Bernanke speaks: more of the same...

Why Porter's favorite short sale is primed for a big fall...

In May, Porter identified one of his favorite short candidates – a well-known tech firm with huge problems lurking in its balance sheet. Since then, its shares have marched straight up…

But that only intensifies our view that when this firm inevitably falls… investors who sold it short will make a big profit. In today's Digest Premium, we review one of Porter's theses... and why this firm is nearly a perfect candidate for selling short.

To subscribe to Digest Premium and access today's analysis, click here.

Why Porter's favorite short sale is primed for a big fall...

Why Porter's favorite short sale is primed for a big fall...

In May, Porter identified one of his favorite short candidates – a well-known tech firm with huge problems lurking in its balance sheet. Since then, its shares have marched straight up…

But that only intensifies our view that when this firm inevitably falls… investors who sold it short will make a big profit. In today's Digest Premium, we review one of Porter's theses... and why this firm is nearly a perfect candidate for selling short.

To continue reading, scroll down or click here.

Bernanke speaks: more of the same... Druckenmiller on the Fed... A new high for Medtronic... And an imminent dividend raise...

 The world was wondering... would the Fed continue with quantitative easing? Or would it begin to taper off its massive bond purchases?

Federal Reserve Chairman Ben Bernanke answered that question in a 2 p.m. policy statement today.

The market was quiet leading up to the announcement. As expected, the Fed announced it would continue to buy $85 billion of bonds each month. The Fed also said the economy is improving (though it stands prepared to increase or decrease the pace of purchases depending on unemployment and inflation).

"The committee sees downside risks to the outlook for the economy and the labor market as having diminished since the fall," the Fed said today after its two-day meeting. Following Bernanke's "more of the same" announcement, the market closed the day down 1%... Also, yields on 10-year Treasurys rose 5% to hit 2.3% – its highest level in a year.

 The economy has been falling short of the inflation and employment targets the Fed set for reining in easing... Bloomberg ran an article this morning saying inflation (excluding food and energy prices) has risen 1.1% this year through April. That's the smallest gain since records began in 1960. And it's well below the Fed's goal of 2% inflation. (Of course, we believe the government's numbers are misleading and inflation is really much higher than that... perhaps closer to 5%. But regardless, the Fed bases its decisions on the official government benchmark.)

And unemployment is still at 7.6%... The average U.S. unemployment rate between 2000 and 2010 was 5.9% – including a low of 4% in 2000 and a high of 9.6% in 2010.

 In addition to not meeting its targets, the Fed also realizes (we hope) the market will crater without its support. On that point, consider the below statements from billionaire fund manager Stanley Druckenmiller.

Druckenmiller is one of the most successful traders of our lifetime. He ran George Soros' legendary Quantum Fund for more than a decade before launching his own fund, Duquesne Capital.

Druckenmiller closed Duquesne Capital in 2010 – two years after the government began easing. We said at the time that more hedge funds would follow his lead and close their doors. Government intervention would make trying to navigate manipulated markets futile.

 The financial blog Zero Hedge recently published an interview Druckenmiller gave to a Goldman Sachs research publication. In it, Druckenmiller admits the Fed has confounded his ability to read the market...

Always remember... We're playing in a rigged market. And history tells us this current experiment – the greatest monetary expansion in history – can't last.

 Shares of blue-chip medical-device giant Medtronic hit a five-year high this week. Retirement Millionaire editor Dr. David "Doc" Eifrig originally recommended shares in March 2011. It's one of the many medical stocks he's recommended to profit from a major shift occurring right now...

As the Baby Boomer generation ages, they will demand more health care. They'll take more drugs. (Doc recommended Walgreen and CVS to take advantage of the trend.) And they'll buy technologies that sustain and improve the quality of their lives… technologies like the ones Medtronic manufactures.

But there's more to Medtronic than the benefits it will receive from this megatrend. As Doc wrote in the March 2011 issue...

 Since Doc's recommendation, Medtronic has raised its dividend twice. Including those payments, his readers are up more than 40%. But we think the payouts – and the gains – could grow soon...

 One of S&A's assistant editors put together the following table, which shows every time Medtronic has raised its dividend since 2000...

If history is any indicator, we should see another Medtronic dividend raise soon...

 Collecting a portfolio of high-quality stocks that pay increasing dividends is at the core of Doc's stock investing strategy. Recently, he recommended subscribers buy shares of a world-class company with a 5% dividend. This company has also paid a dividend since at least 1985.

 
 New 52-week highs (as of 6/18/13): Cisco (CSCO), DCP Midstream Partners (DPM), iShares Germany Fund (EWG), Fidelity Select Medical Equipment & Systems Fund (FSMEX), 3M (MMM), Walgreens (WAG), and WPX Energy (WPX).

 In today's mailbag, one subscriber shares the value he's gotten out of his Alliance membership. Send your e-mails – good or bad – to feedback@stansberryresearch.com.

 "Some of my first trades with Stansberry were using True Income in late 2011. I bought bonds for the first time and learned a ton. I just closed them out based on both the discussion of bonds in Stansberry's Investment Advisory, my observations and the new understanding I have from reading Stansberry publications, specifically the relationship between interest rate and value of the bond. My total return including interest payments and principle was 24%, annualized this worked out to 14.5%. I was able to watch carefully when one of the bonds got downgraded and took a big hit but, because of all I have learned I was able to read the reasoning and go back to the company 10k and decided that the risk was not as severe as the rating company or the market indicated so I held it and it came back up.

"While this is not the time to be investing in Bonds and it is a perfect reason to be an Alliance member. When bonds were right I was able to read True Income and invest where I was not previously comfortable. Other times different investment types and time horizons are more valuable than others. With the breadth of focus across the broad range of products it's terrific to be able to move from one to the other as the landscape changes." – Paid-up subscriber Bill Pennock

Goldsmith comment: We're glad you're happy with True Income and your Alliance membership, Bill.

Regards,

Sean Goldsmith 
Miami Beach, Florida 
June 19, 2013

Editor's note: In today's Digest Premium, we revisit a short-sale recommendation Porter made in the May issue of his Investment Advisory. Since then, the company, brand-name computer maker Hewlett-Packard (HPQ), has jumped higher. But Porter's thesis is just as strong. We will publish Porter's analysis of HP in two parts today and tomorrow…

 As longtime readers know... we like to short three types of companies: 1) frauds, 2) businesses so deeply in debt they have no chance of paying off their obligations, and 3) makers of an obsolete product or service...

In HP, we have a whole lot of No. 3... and a bit of Nos. 1 and 2 as well.

 Founded in 1939 to provide a wide range of electronic products for industry and agriculture, HP has grown into a $40 billion multinational provider of printers, computing systems, and IT services. HP was a pioneer in early semiconductor advances, including calculators, and entered the fledgling computer market in 1966.

The company eventually evolved into a world power in the computing and printing markets. By 2007, HP had earned the distinction of being the world's leading PC company...

 Today, HP's seven divisions are facing stiff headwinds. But the Personal Systems (computers) and Printing (printers) groups will be particularly challenged in the coming years. And those two divisions make up nearly half of HP's revenues.

Competition in the PC market is getting intense, as tablet sales continue to steal customers from PC makers.

In the first quarter of 2013, tablet sales rose 142%, while PC shipments fell 14%. HP's PC numbers are worse. In the first quarter 2012, HP shipped 15.7 million units. A year later, the total had dropped a staggering 24% – down to 11.9 million units.

It may take a long time for PCs to become truly "obsolete." But clearly, HP has a rapidly shrinking market share in a rapidly shrinking market.

 So if tablets are killing HP's core markets... why can't HP start selling tablets? It's trying. HP has partnered with both Microsoft and Google to market tablet products. The problem is Microsoft ended up taking its Surface tablet (which is selling well) to market on its own. And Google Android tablets might soon only come from Google subsidiary Motorola.

So HP now finds itself in an unusual position. Its closest tablet allies are also its biggest tablet competitors. This is not a recipe for success.

Tablet/smartphone alliances are being made, and battle lines are being drawn. Here is how the competitive landscape is shaping up:

• Apple with the iTunes Store and App Store.
• Google/Motorola with the Google Play applications store.
• Microsoft with Nokia – and possibly using Barnes and Noble's "Nook" for its applications store.
• Samsung with the new Tizen operating system originally developed by Intel.

Notice who's not on this list? HP needs partners – but nobody needs HP. (Blackberry is also going in alone in smartphones... without a tablet. That's a sad story for another day.)

 It seems clear that if something saves HP, it's not going to be the Personal Systems division. So what about Printing? That's HP's sweet spot.

Unfortunately, again HP seems to be positioned against a stiff headwind. While the world will never completely stop reading paper, it's using it less frequently. As Forbes recently wrote: "The obvious problem: in a computing era increasingly dominated by mobile devices, consumers are printing less and less."

The environment is so bad, brand-names Lexmark and Kodak both recently pulled out of the printer business. You'd think that would be good for HP's margins and sales. It wasn't. Both are down significantly according to the latest filings (more on that later).

 For years, printers were HP's crown jewel. In 2003 and 2004, Printing generated more than 70% of its operating income. One of HP's most profitable strategies was to partner with good chipmakers (like Intel) and software companies (like Microsoft), sell you a computer, and practically give you a printer to go with it. It could then make money selling you high-priced replacement ink cartridges. This worked well for a while. Today, though, the shrinking sales and margins suggest this business model is falling apart.

The PC market is shrinking and HP is rapidly losing market share. And even if HP can make headway in the exploding tablet market, that won't help the Printing division... people don't print from tablets.

– Porter Stansberry with Sean Goldsmith