An absurd sign of the top...

An absurd sign of the top... One of the craziest things we've heard from Wall Street... E.B. Tucker on Dollar General... John Paulson's big positions in Dollar General and Family Dollar...
 

 We begin today's Digest with signs of the top...

 

To recap our thoughts on the market today... We still think there's upside, but we're approaching the final innings of this bull market. True Wealth editor Steve Sjuggerud is holding out for a "blow-off top." He says we'll likely see a huge rise in stocks just before the crash... And he's probably right.

 

But there's no shortage of the ridiculous behavior that accompanies a peak in the market: assets trading at absurd values, numerous huge takeovers, a willingness to buy almost any security (like coco bonds, for instance)... You know the drill.

 

 Last Friday, we wrote a Digest focused on investor sentiment... and why sentiment shows we still have room to run. We also highlighted warnings from several brilliant investors to proceed with caution.

 

Billionaire hedge-fund manager David Tepper called the end of the bond rally (meaning he believes bond prices will fall and yields will rise).

 

 It is time to proceed with caution. For months, we've been advising you to get out of your riskiest securities, raise some cash, and tighten up your stop losses.

 

And we highlighted the most obvious way to avoid calamity... Don't buy ridiculously overvalued assets – particularly high-yield (or "junk") bonds. This is debt issued by the least creditworthy companies. Today, the yield for junk bonds is around 6%, up from a record-low 4.9%. To put that in perspective, junk bonds yielded 22% in 2008. It's not nearly enough yield to compensate you for the enormous default risk.

 

 But financial-services firm Citigroup disagrees. If you're not happy with the paltry yield offered by the riskiest corporate credits, just lever up and buy more! Keep in mind, many pension funds need about 8% annual returns to meet their obligations (which simply isn't available in debt today). Bloomberg recently published an article citing Citigroup's report...

 

Traders are increasingly using credit-default swaps, which allow them to put less money down to assume a greater amount of potential risk and return than buying debt. Outstanding bets on a current credit-swaps index tied to North American junk bonds have soared to the highest relative level since at least 2011.   To attain that 10 percent return goal using cash bonds, investors need to boost leverage on their high-yield investments to 2.3 times their value, the Citigroup analysts wrote in report dated yesterday. They'd have to leverage Treasuries 8.1 times to achieve the same result.   Junk bonds end up a safer bet because, given those relative levels of borrowing, investors would only lose 9 percent on the securities in a scenario where they post their worst monthly returns since 2011, according to the Citigroup analysts. The damage for Treasuries would be 13.6 percent.   "We find some surprising results," they wrote in the report. "High yield is less risky than Treasuries."

 

 Yes, a major U.S. bank was quoted as saying high yield is less risky than Treasurys... And they're recommending leveraging up to nearly three times to achieve returns. This is how bubbles inflate... Risk goes out the window. People are desperate for returns (and blind to risk), so they are willing to buy and do anything.

 

On to other market action...

 

 Yesterday, we discussed the ongoing discount retail saga of Dollar General (DG)'s takeover bid for Family Dollar (FDO). We noted we weren't thrilled with the possible combination. Today, Stansberry's Investment Advisory research analyst E.B. Tucker explains why...

 

We've been telling you about America's "disappearing middle class" for a while now. We've anticipated the trend and invested in industries that benefit from it as this trend develops, like where people will live and where they will shop. Dollar General is a key beneficiary. It's not a dollar store... It's a retailer of basic goods.   Dollar General and Family Dollar have many overlapping store locations. Dollar General promised to close 1,500 stores if necessary, or 18% of what it will buy. At the new offer of $80 per share, Dollar General will pay nearly $1.4 million for Family Dollar's inferior stores. The market currently values each Dollar General store at $1.8 million.

 

 As E.B. and the rest of the Stansberry's Investment Advisory team pointed out last December, Dollar General has earned its higher valuation. It beats Family Dollar in sales per store by nearly 30%... And it boasts a 67% higher profit per dollar of sales...

 

Part of this advantage is due to the way Dollar General builds stores. It uses a build-to-suit approach, which allows approved developers to risk their own capital to build stores and capture profit when they sell completed stores to passive investors. Dollar General leases the stores back from those investors and focuses its energy on being a good retailer.   On the other hand, Family Dollar micromanages the development process. It didn't like developers making money on store expansion. Consequently, Dollar General stores are usually in better locations than Family Dollar stores... and the sales results confirm that.

 

 As a combined company, a Dollar General/Family Dollar merger would own more than 17,000 stores and $30 billion in revenue. But as E.B. explains, that's not necessarily good news for Dollar General...

 

We believe the increased debt required to complete the transaction would reduce the appeal of Dollar General store leases in the private market. This would make future store expansion more expensive than it has been in the past.   Dollar General would then be left with Dollar Tree (DLTR) as a rival. Today, Dollar Tree is a true "dollar store" – it sells everything for $1. But it could start migrating into general retail to better compete with the new Dollar General/Family Dollar company. We're waiting to see how this situation unfolds before we decide how to proceed. In the meantime, we're telling Stansberry's Investment Advisory subscribers to sit tight and hold their Dollar General shares.

 

 Billionaire hedge-fund manager John Paulson may be the deciding factor on the deal going through...

 

Paulson made a fortune shorting the housing crisis... Then he made billions more as financial stocks recovered. He's a major gold investor and a housing bull. He told everyone to buy rental properties (and bought lots of raw land he correctly predicted homebuilders would need) through his fund. In other words, he understands what the Fed's quantitative easing means for the economy... and how it moves markets.

 

Today, it seems, Paulson agrees with us on the growing wealth disparity (what we're calling the disappearing middle class). Paulson started buying shares of Family Dollar in January 2013... He's now the third-largest shareholder, with 7% of the shares outstanding. He also owns 4 million shares of Dollar General, which he started buying this past January.

 

 So far, Paulson has remained silent on the takeover... The two largest Family Dollar shareholders (which control a combined 15%) are supporting Dollar Tree's $8.5 billion bid. If Paulson votes in favor of the lower bid, Dollar General will have a hard time winning the deal.

 

 We've had a huge response so far for our final Stansberry Conference Series event of 2014, taking place on October 18 in Nashville, Tennessee. We still have some "early bird" seats left at the lowest price we offer. If you would like to hear from former U.S. presidential candidate Ron Paul, financial expert Jim Rickards, Porter, DailyWealth Trader editor Amber Lee Mason, and others, you should consider attending.

 

Plus, Porter is planning his biggest surprise to date – something that we know will shock the audience. But he has sworn me to secrecy. (Our colleagues don't even know what Porter has up his sleeve...) To reserve your seat to the show before we sell out of the rest of our remaining "early bird" tickets, click here.

 

 

 New 52-week highs (as of 9/10/14): WisdomTree Japan Hedged Equity Fund (DXJ), Energy Transfer Equity (ETE), KLA-Tencor (KLAC), Leggett & Platt (LEG), Medtronic (MDT), Altria Group (MO), Microsoft (MSFT), Nuveen Municipal Opportunity Fund (NIO), ProShares Ultra Technology Fund (ROM), and ProShares Ultra Health Care Fund (RXL).

 

 Are you spotting signs of the "disappearing middle class" where you live? Drop us a line at feedback@stansberryresearch.com and let us know what you're seeing.

 

 "Fellas, I'm a McDonald's share holder. In the old days, before I was a Stansberry customer, I would have feared any threats of a minimum wage hike to $15 hurting McDonalds. I certainly would have dumped my shares by now out of panic. However now, given what I have LEARNED from reading Porter's, Dan's, Steve's, and Brian's essays, I actually don't care if there is a wage hike. Because now I know only the biggest and most efficient companies – like McDonalds – can afford to absorb it. Once that happens, McDonalds competitors are wiped out. More business for McDonalds. Once again, politics will destroy the small guys with its unintended consequences. Suppose the average Joe deserves it. They voted. Thanks for the great research." – Paid-up subscriber Matt Vestrand

 

Regards,

 

Sean Goldsmith

Baltimore, Maryland

September 11, 2014

 

The True Wealth Systems computers say this sector can return 100%-plus gains...

 

Steve Sjuggerud's True Wealth Systems computers have delivered subscribers massive gains in health care (252%), large-cap stocks (108%), and big tech (96%).

 

In today's Digest Premium, research analyst Brett Eversole explains how the True Wealth Systems computers identify these set-ups... and details what could soon be the next triple-digit winner...

 

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

The True Wealth Systems computers say this sector is set to soar quickly...
 

Editor's note: Steve Sjuggerud's True Wealth Systems computers have delivered subscribers massive gains in health care (252%), large-cap stocks (108%), and big tech (96%). In today's Digest Premium, research analyst Brett Eversole explains how the True Wealth Systems computers identify these set-ups... and details what could soon be the next triple-digit winner...

 

 

 True Wealth Systems uses a three-pronged system to invest.

 

First, we take a numbers-only approach to the market. A lot of analysts will use some numbers and a lot of gut instinct. We take the gut instinct out and focus on what the numbers are telling us.

 

We also try to come at everything from a historical perspective. History doesn't always repeat itself, but it often rhymes. That's a mantra we have. So we're always looking for what's going on today, how it compares with history, and what opportunity there is going forward.

 

And we combine that numbers approach with Steve's investing methodology, which is buying things that are cheap, hated, and in an uptrend. We take a look at sentiment surveys, shares outstanding, money flows, and other factors to find markets that folks aren't interested in. Then we wait until we can confirm the uptrend.

 

With that three-pronged approach, we let the numbers dictate when to make those trades.

 

 A great example of our strategy in action was a trade that we recently closed out in biotech stocks. We initially got into biotech in January 2012. We bought a double-long biotech fund. We saw it as a sector that had been creeping higher in price, but investors weren't really paying attention or interested in it.

 

We saw it as a stealth bull market. Biotech stocks were breaking out to 10-year highs, but nobody was really paying attention to them. At the same time, biotech companies are hard to value on a normal perspective... But the entire index was trading at a massive discount to where it was over the past decade.

 

We had the value (cheap), we had a market that people weren't really interested in or paying attention to (hated), and it was hitting new highs (uptrend). We were in that trade from January to November and stopped out for a 56% gain. We were in it again from December to this past April and stopped out again for a 184% gain.

 

 The True Wealth Systems computers recently spotted another setup in Brazil. It's an emerging-market opportunity, and we found it really interesting because we believe the Federal Reserve is going to raise interest rates soon. The last time the Fed raised rates in the early 2000s, Brazilian stocks absolutely soared.

 

The Brazilian trade we just recommended in the September issue rose almost 1,700% from 2003 to 2006, based on our computers' historical system.

 

 The last time the Fed hiked rates, U.S. stocks actually went up about 50% during the next couple years. Emerging-market stocks did even better than that. But Brazilian stocks went up 400% in less than two years.

 

We feel there is a lot of value in Brazil today, and like most emerging markets, the typical investor is ignoring it. Over the past two or three months, we have seen Brazilian stocks break out. So we put that all together and see a market that is cheap, hated, and starting an uptrend. Plus, we have the historical comparison with the last time the Fed hiked rates.

 

– Brett Eversole

 

 

Editor's note: Steve's favorite way to profit from the bull market in Brazil could deliver hundreds-of-percent gains quickly. You can gain immediate access to Steve's brand-new recommendation with a subscription to True Wealth Systems. Learn more here.

The True Wealth Systems computers say this sector can return 100%-plus gains...

 

Steve Sjuggerud's True Wealth Systems computers have delivered subscribers massive gains in health care (252%), large-cap stocks (108%), and big tech (96%).

 

In today's Digest Premium, research analyst Brett Eversole explains how the True Wealth Systems computers identify these set-ups... and details what could soon be the next triple-digit winner...

 

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