Tue, Aug 6, 2013|Sean Goldsmith

The economy according to Buffett...

The Securities and Exchange Commission filed a civil action late last month against SAC Capital Advisors' billionaire chief, Steve Cohen... a confrontation that comes after the federal agency's investigation that resulted in guilty pleas from several of the hedge fund's employees and more than $600 million in penalties.

Now, the SEC has locked in on the top guy. It claims he failed to adequately supervise two senior employees and prevent them from insider trading. The consequences for Cohen could be severe, including huge fines and restrictions on his ability to work in the financial industry.

I (Porter) think the whole investigation has been a grave miscarriage of justice. As I wrote in the April 10 Digest Premium...

The traders at SAC are some of the most aggressive on Wall Street. They produce bigger gains than anybody else. And it appears that the government has decided – in retrospect – that some of their behavior was illegal, even though it wasn't at the time. That's wrong.

First of all, I do not believe the prosecution of SAC Capital has been ethical. Instead, I think Cohen was targeted because he is the most successful hedge-fund manager of his generation. This is pure politics. The people in government want to get ahead, and the way they get ahead is by grabbing headlines. This is a great way to do it.

Meanwhile, hedge funds are not part of the politically protected class. Think about it. After Wall Street's latest debacle – the mortgage crisis – none of the major bank heads went to jail. None were indicted. None face civil suits. None of these things happened to any of the guys who were in the club – the protected, "regulated world of banking."

Who does the government go after? The government goes after unregulated hedge-fund guys because they're not part of the program. They're not on the government team. That's why they go after them.

Remember, if the hedge fund goes under, no one bails it out with tremendous amounts of public money... like they did the investment banks. No one bails out the hedge-fund investors.

Second, the investigation is setting a very dangerous precedent... The investigators have used what I'd call gangster tactics to get to Cohen...

They went after a guy who was at the bottom of the pecking order at SAC, a low-level analyst guy. They found that he had done some kind of trading that was suspicious or had been trying to gather information on a clinical trial. You know, just trying to do his job as an analyst. So the investigators call him and say, "Hey, we've got a wiretap of you trying to get information on a company. We think you're over the line. We're going to put you in jail for 10 years unless you tell us that Cohen made you do it."

They scared the absolute crap out of all the lower guys on the totem pole, until they finally made their way up. It's incredible to me that kind of evidence is still allowed in a court of law. It seems so clear to me the witnesses have been coerced. And I think it's a real travesty.

– Porter Stansberry with Sean Goldsmith

This investigation has been a miscarriage of justice…

The federal government recently accused billionaire hedge-fund manager Steve Cohen of abetting insider trading at his firm.

In today's Digest Premium, Porter spells out why everyone should be concerned about the miscarriage of justice the case represents…

To continue reading, scroll down or click here.

This investigation has been a miscarriage of justice…

The federal government recently accused billionaire hedge-fund manager Steve Cohen of abetting insider trading at his firm.

In today's Digest Premium, Porter spells out why everyone should be concerned about the miscarriage of justice the case represents…

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

The economy according to Buffett... Why avoiding insurance companies was smart last quarter... Sjuggerud's bold call... Asia's richest man investing billions in another continent... The stock market could double from here... A touching mailbag...

According to investing legend Warren Buffett, the economy is looking pretty good...

Buffett's holding company, Berkshire Hathaway, announced impressive earnings last week. Berkshire is comprised of more than 70 diversified subsidiaries. And almost all of them grew earnings in the last quarter. In total, Berkshire's second-quarter profit increased 46%, from $3.1 billion a year ago to $4.5 billion in the second quarter.

Earnings before interest, depreciation, and taxes for the company's noninsurance subsidiaries increased 7.8% to $2.4 billion, led by railroad BNSF. And revenue jumped 16% to $44.7 billion... Insurance, railroads, utilities, and energy all grew their top lines.

Berkshire owns companies across all spectrums of the economy – carpet, manufactured homes, private jets, clothing, insurance, ketchup, energy, etc. So Berkshire's positive earnings announcement shows the U.S. economy is plugging along.

At the end of the second quarter, Berkshire had about $11.1 billion less cash than at the beginning of 2013. Buffett spent $12.3 billion in cash on food giant Heinz. And Berkshire subsidiary MidAmerican Energy Holdings announced a plan in May to buy Nevada utility NV Energy for about $5.6 billion.

Plus, Buffett – along with the two investment managers he hired in 2010 and 2011, Ted Weschler, and Todd Coombs – spent around $10 billion on stocks and bonds.

With Berkshire, Buffett takes the money his insurance companies collect in premiums – also known as the "float" – and invests it. Most insurance companies hold predominantly bonds in their investment portfolios. Berkshire, which has greater flexibility than most large insurers, buys high-quality stocks and acquires companies. This major difference helped Berkshire outperform most insurers in the second quarter.

Yields on 10-year Treasurys jumped from 1.85% to 2.49% in the second quarter as prices fell. The corresponding decrease in bond prices – caused by fears the Federal Reserve will halt bond purchases – hurt most insurers.

Big insurance companies got hit. Travelers' book value (its assets minus liabilities) fell 2% in the quarter, its biggest quarterly drop since 2008. AIG's book value lost 2.1%, and Allstate's fell 4.2%. These drops were all caused by falling bond prices.

Meanwhile, the S&P 500 increased 2.4% – pushing up the value of Berkshire's large investment portfolio (primarily comprised of Wells Fargo, Coca-Cola, and IBM). Buffett has long warned that the yields on bonds were too low to cover the risk of inflation... In February 2012, he said bonds were among "the most dangerous" of assets. And he's positioned Berkshire Hathaway to profit in the face of rising interest rates.

The fear of rising interest rates is the main reason Porter, who refers to insurance as "the greatest business in the world," moved the insurance companies in his Investment Advisory portfolio to a "hold."

In the June issue, titled "A Return to Crisis Conditions," Porter said most of his macroeconomic indicators were turning bearish. And this meant potentially bad news for his portfolio of insurance companies. He wrote...

We feel rising interest rates and some of the macroeconomic trends we've discussed above could cause irrational, widespread, and indiscriminate selling of any type of financial company... including our... portfolio [of property and casualty insurance companies]. Smart investors with long-term focus could find some serious bargains in the coming months, and many will load up on these P&C names if the market dips.

For now, we're going to move our entire P&C portfolio to a "hold" position and keep our eye on the situation. If you own these stocks, don't sell them. They're great companies. But buckle up. It could get bumpy.

We also dedicated an entire Digest to discussing how the current environment can affect insurance companies.

We've been warning people about the near-term future for stocks for several months. One of the things Porter and his team recommend is diversifying your assets outside of U.S. securities. True Wealth Systems editor Steve Sjuggerud just recommended a great way to do that.

His latest issue of True Wealth Systems hit inboxes yesterday... And he's making a bold call...

But before we talk about the specific recommendation, a bit about True Wealth Systems...

When launching the publication, Steve wanted to make the same kind of high-quality research hedge funds and investment banks spend hundreds of thousands of dollars a year on available to our readers. And as a former hedge-fund manager, Steve knows what strategies these guys will pay top dollar for.

To create his proprietary trading systems, Steve enlisted the help of a PhD in mathematics and a team of research analysts. They spent hundreds of thousands of dollars and years of man-hours to create a collection of high-probability, high-profit trading strategies.

To date, Steve and his team have found nearly 40 strategies, all tracked by his proprietary software. And the strategies cover all corners of the market – from commodities to stocks to currencies.

Most importantly, though, Steve's system provides precise entry and exit points. The trades couldn't be easier to follow.

And in the latest issue, Steve explained how right now, the richest man in Asia is putting billions of dollars to work... outside of Asia. He's investing in one of the most hated regions in the world today. This man made his $30 billion-plus fortune like Warren Buffett... He opportunistically purchased great businesses at good prices. And he's amassed huge real estate holdings and interests in telecom, retail, and shipping, to name a few. And today, he's taking advantage of this blown-out region to invest billions of dollars.

But he's not the only guru putting money to work in this hated market today. One of Steve's closest investing confidants also recently made the trip to this region to invest his own personal fortune.

Best of all, Steve's trading system says this region is currently a "buy." If you've read any of Steve's work, you know what he looks for in an investment...

He wants something cheap, hated, and in an uptrend. As he wrote, blue-chip stocks in this region are "comically cheap... seriously hated... and as of this month, in a real uptrend. It is time to buy."

Buying a sector when it's "cheap, hated, and in an uptrend" consistently leads to triple-digit gains in the market. Or put another way, you buy when things have gone from bad to less bad. Take buying U.S. stocks in 2009, when the world was in panic mode...

We all know how it played out... Federal Reserve Chairman Ben Bernanke cut interest rates to zero, printed trillions of dollars, and sent the market soaring. U.S. stocks are up more than 150% since then.

When Steve recommended buying U.S. stocks, he called it the "Bernanke Asset Bubble," riding Bernanke's coattails to big gains.

Steve's readers have already made triple-digit gains in health care, biotech, and buying Berkshire Hathaway.

Stocks in the region Steve currently recommends are up less than half compared with U.S. stocks since 2009. Steve believes this region, like the U.S., will also continue to cut interest rates and print more money.

Based on historic data, buying blue-chip stocks in this region at today's prices (currently 17% cheaper than the 10-year average price-to-earnings ratio) has returned an average of 113% in just 2.8 years.

And analysts expect these blue chips will increase their earnings 66% by 2015. (Meanwhile, they expect U.S. blue chips to increase earnings by only 30% over the same period.) As Steve writes...

Said another way, if we assume both indexes trade at their current P/E ratios at the end of 2015, today's opportunity will return 66% in 2.5 years versus just 30% gains in the U.S.

That's more than double the return of U.S. stocks, starting now!

If you'd like to sign up for True Wealth Systems and discover where Steve sees triple-digit profit opportunity, click here.

New 52-week highs (as of 8/5/13): Chesapeake Energy (CHK), Cisco (CSCO), Fidelity Select Medical Equipment & Systems Fund (FSMEX), 1st United Bancorp (FUBC), Hershey (HSY), and ProShares Ultra Technology Fund (ROM).

In today's mailbag, a word of thanks to Doc Eifrig for his health coverage in Retirement Millionaire. Send your notes to feedback@stansberryresearch.com.

"My wife is a 3 year survivor of Triple Negative breast cancer. One thing I learned through her ordeal is; the cancer treatment industry (I call it the "juggernaut") is a well-oiled, set-in-their-ways, money-generating machine (financed by health insurance) that is resistant to disruptive technologies that threaten to change the status quo and thereby their incomes.

"The health insurance industry should be livid about all the very promising research breakthroughs that the AMA has shot out of the saddle in order to preserve its gravy train. Keep up the good work and don't stop reporting the breakthroughs but don't expect to see any of them used any time soon." – Paid-up subscriber James Jensen

Regards,

Sean Goldsmith
Baltimore, Maryland
August 6, 2013

This investigation has been a miscarriage of justice…