The S&A Digest: Signs of a Market Top

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

As of 06/26/2013

The fastest growing economy in the world (it's not China)... Stop trading... Gold does what it should... Lending to Russians?... Why we rant...

Pop quiz. Which country has the highest per-capita growth in real GDP over the last 30 years? If I gave you 30 guesses, you'd still never come up with this answer. It's not China. Or Hong Kong. Or Singapore. It's not Kuwait or any other oil-rich state. It is landlocked, and its topography is dominated (70% of its land mass) by a desert. The country is Botswana.

How did Botswana, surrounded on all sides by chaos, become the fastest growing economy in the world, averaging 9% growth for 30 years? Its leaders could teach America a few things. First, the country has a tiny army whose only real purpose is to catch poachers. (It had no army at all until 1977.) Botswana's government has always lived within its means – budget surpluses are the norm. Likewise, its citizens save and invest: Botswana's trade surpluses have created the largest foreign exchange reserves ($8 billion) in all of Africa.

The economy depends in large part on mining. Recently, large uranium deposits were discovered. And with demand growing for diamonds and precious metals, Botswana should continue to thrive. The big risk for the country is the AIDS crisis. Sources claim one in three people in Botswana are infected...

We're sending our editor-in-chief to Botswana late next week to see for himself what's happening on the ground in Africa's most stable nation. I've asked him to look at real estate, infrastructure, and mining companies. Do you have a friend in Botswana? Do you do business in Botswana? If you can make an introduction for us, please let us know: feedback@stansberryresearch.com.

Good news for the good guys. 12% Letter pick McDonald's (MCD) announced its global same-store sales rose 8.1% in August, largely driven by breakfast sales. Shares of the company gained 4.3% today. PSIA pick Intel (INTC) announced that its revenue for the current period will increase 10% from the year-ago period, up from a forecasted 7%, and profit margins will be toward the higher end of the predicted range. Phase 1 pick Arena (ARNA) jumped 7% premarket after announcing that it got the OK to continue a late-stage study on an anti-obesity drug.

This is a rarity... Our options guru, Jeff Clark, is calling for a trading halt. "Once we finally make our way through this correction, we'll get back to a more stable environment, where swing trading – holding positions for several weeks – is profitable. Right now, though, only the day traders have much of a chance at a profit... If you don't have the luxury of watching the action on a minute-to-minute basis, then it's a smart idea to wait for a more 'normal' trading environment." For more of Jeff's insight into the market and how to profit during these tumultuous times click here.

Russian corporations borrowed $29 billion in the last three months, up 40% from the year-ago period. That's their highest rate of borrowing since the country's $40 billion default in 1998. Some Russian companies are only paying 70 basis points (0.7%) above LIBOR. It seems like the banks want to force the Fed to lower rates by making progressively riskier loans. What's worse than a subprime loan in Florida? Any loan to a Russian company.

Witnessing the collusion between the banks and the government, gold is finally doing what it should: getting out of town. Today is only the 15th time gold has closed above $700. Our own Tom Dyson opines that the market will move higher, because, so far, none of the plumbers are buying. Read Tom's research here...

Happy anniversary, Andrea. I'm not sure what I appreciate more: your remarkable beauty and the graceful way you charm everyone you meet... or the lucky fact that you don't believe in divorce. (I truly married out of my league.) I am as much in awe of you today as I was the first day we met. Thank you – especially for our boy.

Finally... we have new highs: Oakley (OO) and Nokia (NOK).

In the mailbag... I can't remember what, exactly, we're arguing about anymore. It must be time for a new issue. Let's see, I've attacked colleges, global warming, global cooling, our foreign policy, OBAMA!, the potted plant we call "George Bush"... Who can I offend next? Anytime we bring up Soros, we always get a rise out of folks. Maybe it's time to bring back Soros... feedback@stansberryresearch.com.

"Goering said it best at the Nuremburg trials, '...Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger.' I may be tilting toward windmills, but at the end of the day, I will always feel that I am correct in believing that Ron Paul is a true Republican and patriot."

– Paid-up subscriber Jack

"I am a 24-year veteran of the Navy. I totally agree with you, the beauty of the US of A is we can make our own decisions, live and spend our money where we want. So continue to share the missives of some of our best and brightest so I can continue to laugh every evening."

– Paid-up subscriber Herve Kopciak

"Why don't you stop the crap and stick to financial analysis. You are good at that. If I want to hear bunch of political hoopla, I will turn to one of the networks CNBS, Cable etc. One of the reason for subscribing to your newsletters was to get away from the talking heads on TV, here I am getting the same S–T with the S&A Digest, it is getting old, so stop it and get back to work or do what you are good at." – Paid-up subscriber J. Stanisz

"This gentleman [Paul V. Christensen] might benefit from reading the APA's Diagnostic Manual about Narcissistic Personality Disorder, or a definition of the defense mechanism of projection... Either he hasn't lived long enough to see the deterioration in this country in the last few decades or he has been too busy finding fault with others to notice." – Paid-up subscriber G.H. Gammell

"Actually, why do you make political comments at all? Almost anyone, except the most illiterate non-thinker, will hold quite a variety of positions; most strongly held will be colored red, white, and blue, contain one or more of the words honor, motherhood, apple pie, freedom, liberty, etc. Your strongly opposing just a couple of these positions/beliefs will earn that guy's ire. Top that off with a couple of months of picks that go sour, you've pissed him off, and you lose a subscriber. Business model here for a stock pick advisory/newsletter service? Then again, why should I want you to stop? The more broadly a particular investment stance or strategy is diluted with investing adherents, the more ineffective it will become in returning results which beat the indices. I should want you guys to retain just enough subscribers to keep your noses above water and actively researching so I can stick around in the Alliance and make some hay!"

– Paid-up subscriber Jon Pierce

Porter comment: I have silly, old-fashioned ideas about the way things ought to be... and I can't help but talk about these ideas from time to time. In particular, I'm romantic about the idea of America – a republic where liberty was the highest virtue and government was rightly feared and held in check. I'm saddened and sickened by how willingly – and even eagerly – so many of my fellow citizens will exchange their liberty for a paternal, stifling, busy-body government that promises what it cannot possibly deliver. I am stupefied by the ease at which the public is manipulated by the press. And I'm variously entertained and horrified by the delusions of our senior military and political leaders. Their latest? The Sunnis are our friends, we should give them weapons. Ha, ha, ha...

Regards,

Porter Stansberry

Baltimore, Maryland

September 11, 2007

Signs of a Market Top

By Ian Davis

Total U.S. employment fell for the first time in four years, Bloomberg reported on Saturday. In my opinion, this is a sign of a market top.

For the last 21 months, the United States has enjoyed what most economists would consider full employment.

Full employment, contrary to how it sounds, is not 0% unemployment. In fact, many economists believe full employment occurs when the unemployment rate is somewhere between 4% and 7%.

Zero percent unemployment is unobtainable (or at least unsustainable). For one, the workforce will always include a certain amount of frictional unemployment... the percent of people who are unemployed simply because they are in the process of switching jobs.

Also, extremely low employment tends to cause the economy to overheat, leading to issues like high inflation, which damages the economy.

Historically, periods of full employment are short lived. Also, contrary to what you might expect, the market has lackluster returns during these economic booms.

The following table shows the performance of the S&P 500 at various levels of unemployment. As you can see, when unemployment is low (below 6%), the market returns only about 4.5% annually... when unemployment is greater than 6%, the market returns an amazing 16.1% annually.

It's possible this happens because the Fed interprets low unemployment to mean the economy is healthy and thus is not afraid to use restrictive and otherwise harmful monetary policies. Conversely, when the unemployment rate is very high, the Fed considers the economy to be weak and is thus more likely to be accommodating.

Where We Are Now

Currently, the unemployment rate in the U.S. is 4.6%.

An unemployment rate this low is rarely seen, and rarely lasts longer than a year or two... The unemployment rate last fell below 5% in the late '90s, shortly before the dot-com crash.

The following chart shows all of the previous times in the last 43 years that the unemployment rate has started to rise after reaching an extreme low

(below 4.8%).

Low Unemployment Signals Market Peaks

As you can see, the lows in unemployment often correspond with tops in the S&P 500.

Conclusion

Enormous gains are made in the stock market when things go from bad to less bad... Similarly, the time to watch out is when the opposite happens, and things go from great to less great.

Right now, as far as employment is concerned, the economy is great... but these good times may be changing. With U.S. employment numbers beginning to fall, we may have reached a new bottom in unemployment.

Now might be a good time to start thinning your portfolio of small, risky growth stocks, and making sure you have some solid value plays... like my most recent Quant Trader recommendation of Berkshire Hathaway (NYSE: BRK.A or BRK.B).

Good investing,

Ian Davis

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