Thu, Jan 9, 2014|Sean Goldsmith

Observations on the ground in Nicaragua...

What in the world is cheap today...

In Monday's Digest Premium, I (Brian Hunt) told you large-cap tech stocks are cheap. And although the market is trading at all-time highs, you can still find some pockets of value.

For example, platinum is cheap right now. An ounce of platinum currently trades close to the cost of mining and producing it. If the market price falls much lower, mining platinum becomes unprofitable...

Add to that... political basket-case South Africa produces the majority of the world's platinum. Labor strikes and government intrusion can disrupt that supply... which drives up the price. So being long platinum means you're essentially betting on political instability in South Africa. And that's a very good bet.

Uranium is also trading near production costs. It has been in a bear market since the 2011 Fukushima power-plant disaster in Japan.

Emerging markets – like Russia – are very cheap. Russia is trading for around five times earnings, compared with the U.S. stock market, which is trading for around 19 times earnings. You can get broad exposure to Russia with the Market Vectors Russia Fund (RSX). You can read more about Russia in Wednesday's Digest.

So today in general, platinum, uranium, and emerging markets are cheap.

Another thing most people aren't talking about that has the potential to stage a huge rally would be aluminum stocks. The aluminum sector has been clobbered by excess capacity and concerns over the global economy. Aluminum stocks suffered a big bear market from 2011 to mid-2013.

I believe that as the global economy continues to gain steam, the world will consume a little bit more aluminum. It will also consume a little bit more steel.

You've seen the steel sector pick up already. We told subscribers to our trading service DailyWealth Trader to buy steel in August. U.S. Steel (X) is up 70% since that recommendation. Aluminum should be the next train to leave the station.

– Brian Hunt

What in the world is cheap today...

The markets are trading at all-time highs... But certain sectors still present a great value.

In today's Digest Premium, Editor in Chief Brian Hunt tells you several assets he thinks will rally this quarter.

To continue reading, scroll down or click here.

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

As of 01/08/2014

Stock	Symbol	Buy Date	Return	Publication	Editor
Rite Aid 8.5%	767754BU7	02/06/09	674.3%	True Income	Williams
Prestige Brands	PBH	05/13/09	474.6%	Extreme Value	Ferris
Enterprise	EPD	10/15/08	258.5%	The 12% Letter	Dyson
Constellation Brands	STZ	06/02/11	231.4%	Extreme Value	Ferris
Ultra Health Care	RXL	03/17/11	204.3%	True Wealth	Sjuggerud
Altria	MO	11/19/08	189.8%	The 12% Letter	Dyson
GenMark Diagnostics	GNMK	08/04/11	176.9%	Phase 1	Curzio
McDonald's	MCD	11/28/06	172.9%	The 12% Letter	Dyson
Ultra Health Care	RXL	01/04/12	165.7%	True Wealth Sys	Sjuggerud
Fluidigm	FLDM	08/04/11	161.5%	Phase 1	Curzio

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.

Top 10 Totals

1	True Income	Williams
2	Extreme Value	Ferris
3	The 12% Letter	Dyson
1	True Wealth	Sjuggerud
2	Phase 1	Curzio
1	True Wealth Sys	Sjuggerud

What in the world is cheap today…

The markets are trading at all-time highs... But certain sectors still present a great value.

In today's Digest Premium, Editor in Chief Brian Hunt tells you several assets he thinks will rally this quarter.

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

Observations on the ground in Nicaragua... Porter's biggest fear... Why Buffett agrees with Porter... This stealth bull market means the economy is growing... New high for Wells Fargo... Record bank profits... How you could be putting your personal information at risk... Why it's important to read what we write...

Before getting to the regular Digest, a quick personal note...

Today, I'm at our parent company's development in Nicaragua – Rancho Santana. I'm down here hosting a few subscribers on the property through the weekend. (A welcome break from the nine-degree deep freeze I endured in New York City earlier this week.)

We've been writing about Nicaragua for years... and updating you on the progress. It's remarkable how far Nicaragua and "The Ranch," as well call the development, have come since we began traveling to and investing here in the late '90s.

The two major developments for The Ranch are the paved road from the closest town, Tola, and a new airport minutes from our property. But improvements are thanks to a new development just down the street from ours being built by Nicaragua's richest man, Carlos Pellas.

A few quick observations I noticed immediately upon entering the customs area... The lines are huge. I've never seen the airport so busy. More and more foreigners are discovering this country.

Also, the local rum, Flor de Cana, rebranded itself – changing the label design and shape of the bottle. It's much hipper now... more appropriate for a wealthier consumer. Flor de Cana, which Pellas owns, also introduced its most premium rum – a 25-year-old vintage available only in the airport. Again, it's clearly aimed at the new, wealthier tourist.

When I entered the customs area, I was greeted for the first time by people trying to change my money into the local currency, cordobas, at usurious rates and offering other services.

I'm also hearing about more celebrities and megawealthy people visiting the country... A former U.S. president was just down here with his family for Christmas. The founder of a giant asset manager (with trillions under management) recently visited.

I'm not sure when I'll be down here next... But if you'd like to visit, just e-mail Marc Brown (marcb@ranchosantana). He'll set you up.

I'll leave you with a quick shot of my workspace today:

On to the markets...

Porter's biggest fear today is that rising interest rates will cause the stock market to fall.

Interest rates will rise as the economy recovers. An improving economy is obviously bullish for corporate earnings. However, interest rates influence what valuation investors will place on those earnings.

We explained this relationship in the August 15 Digest:

[I]nterest rates influence what people will pay for stocks. They're a critical factor determining the earnings multiple for stocks.

Bonds are generally less risky than stocks. As bond yields rise, stocks become less attractive.

Today, money in a savings account earns nothing. And 10-year Treasurys (the so-called "risk-free" rate), while up from the bottom, still pay less than 3%. That's why today, stocks are relatively attractive.

But imagine if you could earn 5% in your savings account... Would you still be rushing out to buy stocks?

So as interest rates rise, the earnings multiple for stocks contracts.

Interest rates could easily double from today's rates in a short period of time. But even assuming an improving economy, earnings would improve much slower. They wouldn't double overnight.

That means the multiple investors would pay for stocks falls, resulting in lower stock prices.

Porter also described the relationship in the August 2 Digest Premium:

I'm convinced interest rates are going higher. And that will cause a lot of companies to report lower earnings in the future. More important, it will put pressure on the market "multiple." In other words, stocks are trading at 16-18 times earnings right now. In an environment with rates at 4% or 5%, you'll see stocks trade at 12-14 times earnings. So if earnings fall... and the market places less value on earnings... that will have a huge impact on stocks...

Consider this example: From December 3, 1964 to December 31, 1981, U.S. gross domestic product (GDP) soared 370%. And sales of Fortune 500 companies grew six times over.

Meanwhile... the Dow Jones Industrial Average stock index barely budged – from 874.12 to 875. As billionaire investor Warren Buffett quipped to Forbes magazine in 1999: "Now, I'm known as a long-term investor and a patient guy, but that is not my idea of a big move."

So why didn't the tremendous economic growth not move stocks?

Buffett explained:

To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line.

Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate.

Consequently, every time the risk-free rate moves by one basis point – by 0.01% – the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest-rate changes is usually obscured. Nonetheless, the effect – like the invisible pull of gravity – is constantly there.

In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities. So there – in that tripling of the gravitational pull of interest rates – lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going nowhere.

Interest rates can stay low for a long time (especially with Janet Yellen soon to be at the helm of the Federal Reserve). And stock prices can continue the upward march longer than most folks expect... It's all a function of the massive amount of money central banks have injected into the economy since the financial crisis.

But remember the words from Porter and Buffett... Even with an upbeat economy, rising interest rates can pull down stocks.

For now, the market continues its march upward. And one sector reflects major global growth. From yesterday's DailyWealth Market Notes:

Shipping stocks are a useful way to monitor the global economy. They rise and fall with global demand for things like iron ore, coal, crude oil, grain, and manufactured goods.

A good way to track shippers is with the Guggenheim Shipping Fund (SEA). This fund's constituents haul raw materials and finished goods across the world's oceans. The world's largest container-ship operator, Maersk, is the fund's largest holding.

Overcapacity and a sluggish economy depressed this fund in 2011 and 2012. But as you can see from today's chart, SEA is recovering. In 2013, the fund climbed 37%. And in just the past month, it reached a fresh two-year high. This is a key bull market almost no one is talking about... And it's a sign the economy is doing better than the pessimists would have you believe.

We told you about bank stocks hitting new highs in Monday's Digest – JPMorgan and Bank of America were hitting new highs. Yesterday, another behemoth, Wells Fargo, joined the new-high crowd.

According to analysts surveyed by Bloomberg, the six largest U.S. banks should post a collective profit of $74.1 billion for 2013 – a 21% increase from 2012. That is their second-best year behind only 2006, when the banks brought in $84.6 billion in profits. Add back the more than $18 billion banks paid for legal issues last year, and 2013 could be their most profitable year in history.

The same analysts also expect Wells Fargo, the fourth-largest bank by assets, to be the most profitable in 2013 – surpassing JPMorgan for the first time since 2009.

And Wells Fargo is a plain-vanilla bank. It makes most of its money from retail banking and mortgage lending, unlike major Wall Street banks that make big money from proprietary trading. And analysts think Wells Fargo's net income will hit $21 billion for 2013 – what would be the bank's fifth-straight annual record.

Banks have been some of the biggest gainers from the Fed's easy-money policies. They've been able to borrow money for almost nothing, lend it to a growing customer base, and collect the spread. And thanks to an implicit government backstop, they've been able to do this with almost no risk.

Warren Buffett is a major Wells Fargo shareholder. Dr. David "Doc" Eifrig also holds the stock in his Retirement Millionaire model portfolio. His subscribers are up more than 40% since his April 2012 recommendation.

In addition to his financial advice, Doc Eifrig loads his Retirement Millionaire newsletter with insights into taking control of your health and finances. Recently, he warned subscribers about how logging onto public Wi-Fi connections can put your personal information at risk...

Many businesses, like coffee shops, hotels, and airports, offer these free wireless Internet connections. Lots of people log on every day without a second thought.

However... as Doc explained...

The U.S. government recently updated warnings on using free, public Wi-Fi. First, you're logging on to a connection that isn't secure... allowing hackers to retrieve whatever information they want from your computer. Secondly, the connection you're using could be a fake. Hackers can make their Wi-Fi connections look identical to a legitimate connection. If you log on to one of these, the hacker gets access to your passwords, credit card information, and other personal information.

The easiest way to protect yourself is to never use a public Wi-Fi connection. But if you're using public Wi-Fi now... you probably don't want to give up the convenience. If you want to continue to enjoy sitting in a Starbucks while you work, make sure you use a virtual private network (VPN). VPNs secure your Internet connection and encrypt your data. One of the top providers is WiTopia. With plans as low as $39.99 semi-annually, all you have to do is download software to surf the web securely.

Technology blog Lifehacker has a list of well-known VPN providers. You can learn more about them and the benefits of having a VPN here.

If you enjoy this type of information, I'd encourage you to get a copy of Doc's new book – The Doctor's Protocol Field Manual.

In the manual, Doc compiles his extensive research into how to prepare you and your family to survive any kind of crisis – natural, manmade, or economic. His insights include secrets like the best medical supplies and medications to have on hand (and how to get them) to the No. 1 way to prevent almost any home break-in.

You can get the book free with a subscription to Retirement Millionaire... It's only $39 for one year. And we offer a 100% money-back guarantee. The book is yours to keep, either way.

You can sign up, without watching a long video, here...

New 52-week highs (as of 1/8/14): Alcoa (AA), Abbott Labs (ABT), Activision Blizzard (ATVI), Becton-Dickinson (BDX), ProShares Ultra Biotechnology Fund (BIB), BP (BP), Dolby Laboratories (DLB), PowerShares Chinese Yuan Dim Sum Bond Fund (DSUM), Corning (GLW), iShares Biotechnology Fund (IBB), Kohlberg Kravis Roberts (KKR), Medtronic (MDT), Marvell Technology (MRVL), ONEOK (OKE), Sturm, Ruger (RGR), RPM International (RPM), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), Constellation Brands (STZ), Targa Resources (TRGP), Virginia Mines (VGQ.TO), Wells Fargo (WFC), and Zhone Technologies (ZHNE).

In today's mailbag, a reminder why it's important to read our work carefully... Send your feedback to feedback@stansberryresearch.com.

"[Your SIA] blacklist [is] not doing so well. I inputted you Blacklist from last issue just for fun. Bought 100 shares of each." – Paid-up subscriber BC

Goldsmith comment: The SIA Black List, which Porter publishes every month in Stansberry's Investment Advisory, is not a list of stocks we recommend buying (or selling short). Porter and his team use it as an indicator to take the market's temperature.

It's a list of stocks with market caps of more than $10 billion that are trading for more than 10 times sales. In other words – the most overvalued big companies in the market.

In case you missed it, just below the list, they publish this warning each month:

Please note... We are not attempting to pass judgment on any individual business by including them in this list. Instead, we're interested in the total number of companies. In our experience, you will find fewer than five companies on our Black List during stock market bottoms and more than 10 companies on our list around stock market tops.

In the latest issue, 19 stocks appeared on the list. That's a strong "bearish" sign for the market.

Regards,

Sean Goldsmith

Rancho Santana, Nicaragua

January 9, 2014

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

Investment

Sym

Holding Period

Gain

Publication

Editor

Seabridge Gold	SA	4 years, 73 days	995%	Sjug Conf.	Sjuggerud
ATAC Resources	ATC	313 days	597%	Phase 1	Badiali
JDS Uniphase	JDSU	1 year, 266 days	592%	SIA	Stansberry
Silver Wheaton	SLW	1 year, 185 days	345%	Resource Rpt	Badiali
Jinshan Gold Mines	JIN	290 days	339%	Resource Rpt	Badiali
Medis Tech	MDTL	4 years, 110 days	333%	Diligence	Ferris
ID Biomedical	IDBE	5 years, 38 days	331%	Diligence	Lashmet
Northern Dynasty	NAK	1 year, 343 days	322%	Resource Rpt	Badiali
Texas Instr.	TXN	270 days	301%	SIA	Stansberry
MS63 Saint-Gaudens		5 years, 242 days	273%	True Wealth	Sjuggerud