An update on why you shouldn't invest in commodity stocks...

 In the March 1 Digest, Porter explained "why you shouldn't buy commodity stocks."

Commodity businesses are generally low-margin... And they require lots of capital to operate. "Investing in commodity companies (companies that produce commodities or make commodity-like products) is a hard way to get rich," he wrote.

"That's because of two simple reasons... First, it's difficult for these firms to produce excess returns on their capital. By definition, they can't differentiate or brand their production," he explained. "Second, it's awfully hard for these companies to produce growth in free cash flow or profits that can be distributed to investors (in dividends or share buybacks). Usually, the companies require a ton of capital to replace inventory that's been sold."

 It's true. Fortunes can be made in the commodity business... But if you're going to speculate in the sector, you have to understand how cyclical these businesses are. From the same March Digest...

 Said another way (in the words of resource legend Rick Rule), in the commodity business, the cure for low prices is low prices. Likewise, the cure for high prices is high prices.

The capex cycle makes it difficult to invest in these companies for the long term. Even if you understand the cycle, these trends can still continue for longer than you'd imagine possible.

 Making commodity investing even more difficult is the constant technological innovation going on in the sector. New methods for extracting resources (think hydraulic fracturing – or "fracking" – in the oil sector) and new production techniques can cause supply to explode... and prices to plummet.

Consider this bit from a Wall Street Journal article, which explains how a growing China was able to disrupt the nickel industry to supply its own needs...

According to the article, analysts estimate around 40% of nickel miners are losing money today.

Ivan Glasenberg, CEO of commodities giant Glencore-Xstrata (the world's fourth-largest nickel miner), said he was bearish on nickel prices earlier this year. And in October, his company announced it would shutter its Falcondo mine in the Dominican Republic.

And Vladimir Potanin, CEO of Norlisk, the world's leading nickel producer, doesn't see the trend reversing any time soon. "China is becoming self-sufficient" in terms of nickel, Potanin said. "They are producing steel, which they need for their industrial development. They need this nickel pig iron close to where the steel is made. I think they're smart enough, and powerful enough to keep doing both forever."

 As you can see from the following chart, the trend is down in nickel prices...

 In today's DailyWealth Market Notes, S&A Editor in Chief Brian Hunt highlighted one sector that's soaring, thanks to the "Bernanke Asset Bubble."

 The private-equity sector, which we discussed yesterday, is also marching to higher highs...

Yesterday, shares of True Wealth holding Blackstone Group (BX) and Small Stock Specialist holding Kohlberg Kravis Roberts (KKR) hit new highs...

As we mentioned yesterday, investing in private equity is a great way to profit from the government's "E-Z Credit" policy.

Expanding credit means these firms can borrow larger and larger amounts of money... And they can do so at artificially low interest rates.

Expanding credit also means private equity can attract more money. Like hedge funds, private-equity firms typically charge a performance fee and a fee for assets under management. More assets means more earnings. Consider this data from the Financial Times...

Hedge funds increased their assets under management by $360 billion since the end of 2012, according to data firm Preqin. The article noted that total assets are around $2.7 trillion... a 15.7% increase (5% of that increase came from inflows... the rest from investment returns).

 Private-equity firms also see their values increase as their holdings increase in value (wholly owned companies, equities, and real estate). And they're able to get rich valuations when they sell assets.

Blackstone could make the largest profit in the history of private equity by floating shares of hotel operator Hilton Worldwide Holdings on the public markets today – a paper profit of more than $8 billion.

Blackstone bought the company in 2007, then saw hotel occupancy and real estate values crumble.

Hilton and existing shareholders are offering 112.8 million shares in the IPO priced between $18 and $21 each. As of yesterday afternoon, the sale was more than five times oversubscribed, meaning it saw far more demand from potential investors than it could accommodate.

 Blackstone isn't selling its 750.6 million shares. Valuing those shares in the middle of the IPO range gives them a value of $14.6 billion. With the approximately $6.5 billion Blackstone spent on the company, that would be a paper profit of $8.1 billion.

If shares trade higher than the range – which is likely, considering the fervor surrounding IPOs today – Blackstone will make an even larger fortune.

So you can see why Blackstone and KKR have trounced the market in 2013...

 New 52-week highs (as of 12/10/13): Blackstone Group (BX), CVS Caremark (CVS), Dolby Laboratories (DLB), and Kohlberg Kravis Roberts (KKR).

 China's currency – the yuan (or renminbi) – is now the second-most-used currency in trade... And our readers want to know how to play the trend now. Send your questions to feedback@stansberryresearch.com.

 "Given the ongoing weakness in the US Dollar and its bleak outlook, how can investors take advantage of the world's evolving confidence in the Chinese Yuan?" – Anonymous

Goldsmith comment: Steve Sjuggerud dedicated the November issue of True Wealth to this exact topic. He explained why he thinks the yuan will soar – one investment legend thinks it could appreciate 500% versus the dollar. And he told readers his favorite way to profit from it.

If you sign up for True Wealth, you'll also receive Steve's currency seminar... which is the ultimate primer for anyone wanting to learn more about protecting your hard-earned money. He divulges the one currency you should own for the next 10 years.

We maintain that by simply reading Steve's seminar, you'll be far more informed than the vast majority of investors... And it should take you less than 30 minutes to read it.

You can learn more about Steve's currency seminar – and a subscription to True Wealth – by clicking here.

Regards,

Sean Goldsmith
Miami Beach, Florida
December 11, 2013

An update on why you shouldn't invest in commodity stocks... China's nickel innovation... Gaming stocks are booming... Private-equity stocks hit new highs... The biggest profit in the history of private equity?... How to play the yuan...

In today's Digest Premium, Chris Mayer discusses a unique way to think about gold... and whether he believes it's time to start speculating in gold stocks.

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

Stansberry & Associates Hall of Fame
(Top 10 all-time, highest-returning closed positions across all S&A portfolios)

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 12/10/2013

Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.

How to play gold stocks today...

 In the March 1 Digest, Porter explained "why you shouldn't buy commodity stocks."

Commodity businesses are generally low-margin... And they require lots of capital to operate. "Investing in commodity companies (companies that produce commodities or make commodity-like products) is a hard way to get rich," he wrote.

"That's because of two simple reasons... First, it's difficult for these firms to produce excess returns on their capital. By definition, they can't differentiate or brand their production," he explained. "Second, it's awfully hard for these companies to produce growth in free cash flow or profits that can be distributed to investors (in dividends or share buybacks). Usually, the companies require a ton of capital to replace inventory that's been sold."

 It's true. Fortunes can be made in the commodity business... But if you're going to speculate in the sector, you have to understand how cyclical these businesses are. From the same March Digest...

 Said another way (in the words of resource legend Rick Rule), in the commodity business, the cure for low prices is low prices. Likewise, the cure for high prices is high prices.

The capex cycle makes it difficult to invest in these companies for the long term. Even if you understand the cycle, these trends can still continue for longer than you'd imagine possible.

 Making commodity investing even more difficult is the constant technological innovation going on in the sector. New methods for extracting resources (think hydraulic fracturing – or "fracking" – in the oil sector) and new production techniques can cause supply to explode... and prices to plummet.

Consider this bit from a Wall Street Journal article, which explains how a growing China was able to disrupt the nickel industry to supply its own needs...

According to the article, analysts estimate around 40% of nickel miners are losing money today.

Ivan Glasenberg, CEO of commodities giant Glencore-Xstrata (the world's fourth-largest nickel miner), said he was bearish on nickel prices earlier this year. And in October, his company announced it would shutter its Falcondo mine in the Dominican Republic.

And Vladimir Potanin, CEO of Norlisk, the world's leading nickel producer, doesn't see the trend reversing any time soon. "China is becoming self-sufficient" in terms of nickel, Potanin said. "They are producing steel, which they need for their industrial development. They need this nickel pig iron close to where the steel is made. I think they're smart enough, and powerful enough to keep doing both forever."

 As you can see from the following chart, the trend is down in nickel prices...

 In today's DailyWealth Market Notes, S&A Editor in Chief Brian Hunt highlighted one sector that's soaring, thanks to the "Bernanke Asset Bubble."

 The private-equity sector, which we discussed yesterday, is also marching to higher highs...

Yesterday, shares of True Wealth holding Blackstone Group (BX) and Small Stock Specialist holding Kohlberg Kravis Roberts (KKR) hit new highs...

As we mentioned yesterday, investing in private equity is a great way to profit from the government's "E-Z Credit" policy.

Expanding credit means these firms can borrow larger and larger amounts of money... And they can do so at artificially low interest rates.

Expanding credit also means private equity can attract more money. Like hedge funds, private-equity firms typically charge a performance fee and a fee for assets under management. More assets means more earnings. Consider this data from the Financial Times...

Hedge funds increased their assets under management by $360 billion since the end of 2012, according to data firm Preqin. The article noted that total assets are around $2.7 trillion... a 15.7% increase (5% of that increase came from inflows... the rest from investment returns).

 Private-equity firms also see their values increase as their holdings increase in value (wholly owned companies, equities, and real estate). And they're able to get rich valuations when they sell assets.

Blackstone could make the largest profit in the history of private equity by floating shares of hotel operator Hilton Worldwide Holdings on the public markets today – a paper profit of more than $8 billion.

Blackstone bought the company in 2007, then saw hotel occupancy and real estate values crumble.

Hilton and existing shareholders are offering 112.8 million shares in the IPO priced between $18 and $21 each. As of yesterday afternoon, the sale was more than five times oversubscribed, meaning it saw far more demand from potential investors than it could accommodate.

 Blackstone isn't selling its 750.6 million shares. Valuing those shares in the middle of the IPO range gives them a value of $14.6 billion. With the approximately $6.5 billion Blackstone spent on the company, that would be a paper profit of $8.1 billion.

If shares trade higher than the range – which is likely, considering the fervor surrounding IPOs today – Blackstone will make an even larger fortune.

So you can see why Blackstone and KKR have trounced the market in 2013...

 New 52-week highs (as of 12/10/13): Blackstone Group (BX), CVS Caremark (CVS), Dolby Laboratories (DLB), and Kohlberg Kravis Roberts (KKR).

 China's currency – the yuan (or renminbi) – is now the second-most-used currency in trade... And our readers want to know how to play the trend now. Send your questions to feedback@stansberryresearch.com.

 "Given the ongoing weakness in the US Dollar and its bleak outlook, how can investors take advantage of the world's evolving confidence in the Chinese Yuan?" – Anonymous

Goldsmith comment: Steve Sjuggerud dedicated the November issue of True Wealth to this exact topic. He explained why he thinks the yuan will soar – one investment legend thinks it could appreciate 500% versus the dollar. And he told readers his favorite way to profit from it.

If you sign up for True Wealth, you'll also receive Steve's currency seminar... which is the ultimate primer for anyone wanting to learn more about protecting your hard-earned money. He divulges the one currency you should own for the next 10 years.

We maintain that by simply reading Steve's seminar, you'll be far more informed than the vast majority of investors... And it should take you less than 30 minutes to read it.

You can learn more about Steve's currency seminar – and a subscription to True Wealth – by clicking here.

Regards,

Sean Goldsmith
Miami Beach, Florida
December 11, 2013

Editor's note: This week, we've featured investing insight from our friend and colleague Chris Mayer, editor of the excellent Capital & Crisis newsletter. So far, we've covered why most stocks lose money and the factors pushing the market to new all-time highs. Today, he discusses the potential upside in gold stocks...

 Seth Klarman is one of the greatest investors ever. He runs a hedge fund called Baupost Group. I (Chris) saw him speak at the Grant's Interest Rate Observer conference and he talked about gold. It was one of the best-articulated reasons for owning gold I've ever heard. Klarman has only about 1% or 1.5% of his assets in gold.

The reason why you want to own gold is because gold has this "optionality" to it. In other words, it's not hard to imagine a time where people start to worry about the dollar or worry somehow about the solvency of the U.S... and where people maybe are not willing to buy bonds so much at today's prices.

Gold will be something that reacts then, and it could jump very quickly. Gold can move, and it's not hard to imagine it going to $3,000 or $5,000 an ounce.

 Klarman did it by buying options, which is interesting, because as he said, they expire worthless all the time. But it's one of those things where he has a small position and if we do have some kind of event like that, then gold could be worth five or 10 times [what he invested] in it.

That's also true for gold stocks. But you shouldn't go big on gold stocks. They're bad businesses in general. And as we saw, it hasn't worked in the last two years. The sector can get pretty nasty and stay that way for a while. Maybe gold stocks go lower, I don't know. But they are pretty cheap, and when things do turn, some of these gold stocks could easily [trade for] five or 10 times what they [trade for] today.

We have time before the gold-stock explosion happens. It would probably be good to take some positions now. But you have to be patient. It could be a few years. So to be a gold-stock investor, you have to be the kind of investor who doesn't mind your investment going nowhere for three years or [falling] in half in three years, just knowing that there's going to be a point when they take off.

When that happens, those stocks will move very quickly... And you'll make three, four, five times your money. So that's a reasonable strategy. I haven't recommended gold stocks yet. We got out of our gold stocks a while ago, and that has turned out to be a good decision. But we took some losses there.

Gold ought to go up, and gold stocks are probably a bargain, but I'm not dogmatic about it. So I'm kind of different than a lot of my peers who are always pounding the table on gold, gold, gold, gold. It's interesting, but I wouldn't put a big percentage to work in gold.

– Chris Mayer

Editor's note: In his Capital & Crisis newsletter, Chris consistently shows his readers how to increase their wealth without taking large risks... without gambling their money away... and without spending a lot of time studying the market. To learn more about a subscription to Capital & Crisis – and how to receive a free copy of his newest book, World Right Side Up: Investing Across Six Continents – click here.

How to play gold stocks today...

In today's Digest Premium, Chris Mayer discusses a unique way to think about gold... and whether he believes it's time to start speculating in gold stocks.

To continue reading, scroll down or click here.