Time to be cautious...

 "The stock market is setting up for a big correction. It's time to be incredibly cautious with your investments," Porter and Braden warned subscribers in their latest Stansberry's Investment Advisory.

In the issue, Porter and Braden give you something far more valuable than just another stock pick... They show you three secrets (their proprietary indicators) for accurately timing the markets. You can use these indicators to know when it's time to buy stocks again.

I can't give you the full details, but they call one indicator the "Black List" of overvalued large stocks. At the last stock market peak in October 2007, 14 stocks made the Black List. Today, 13 stocks are on the list. As Warren Buffett said, "Be fearful when others are greedy, and greedy when others are fearful." Investors are greedy today. You should be cautious.

This is an important issue. Using the proprietary indicators, you'll be much more comfortable investing in the stock market. Porter and Braden also discuss the importance of short selling (which we know most of you won't attempt)... and what asset mix you should hold if you refuse to short stocks.

Subscribers can access the latest SIA here. To sign up, click here...

(Editor's note: Porter addresses some confusion regarding his Black List at the end of today's Digest.)

 We all know PIMCO's Bill Gross, manager of the world's largest mutual fund, completely sold out of U.S. Treasurys. Gross held 12% of his $250 billion fund in Treasurys as of February. Thanks to quantitative easing (money-printing), the Fed is purchasing 70% of newly issued Treasury bonds. When quantitative easing ends in June, Gross believes – as we do – bonds will plunge and interest rates will rise. Gross has even started buying equities (for the first time in the history of his Total Return Fund) to hedge his portfolio.

 In a period of rising interest rates, are all bonds bad investments? No. You just have to make sure you're buying bonds with a large margin of safety. Longtime Digest readers know how proud we are of True Income, our bond-investing service. True Income editor Mike Williams, a Chartered Financial Analyst (CFA), is by far the most experienced analyst on our staff... And his track record backs that up.

 As Mike reminds readers constantly… the key to bond investing is making sure you get paid. Rampant inflation?… Economic contraction?… It makes no difference if you can secure a big enough income stream. In 2010, the True Income portfolio offered readers an 8% cash yield.

That may seem like an afterthought when True Income is posting total returns of 23% (in 2010) and 81% (in 2009). But the bond market may not always offer those kinds of dynamic capital returns. It will always offer the chance to book steady cash payments… if you know how to analyze bond issues. In True Income, Mike makes sure his subscribers are getting paid income all the time...

 Since its February 2008 inception, True Income has navigated the worst recession since the Great Depression… massive changes in the capital markets (including a near collapse of the system in September 2008)… and a record down year for bonds, followed by a record up year. Through it all, the True Income portfolio of high-yield bonds has gained 69.1%. Mike outperformed his benchmark, the Merrill Lynch High Yield Index, by about 20% over that period.

And it's not too late to enjoy these kinds of returns. While True Income's performance has been outstanding and exceeded our target returns every year… Right now, the portfolio features three excellent buying opportunities. These three recommendations represent an ideal starter portfolio of bonds… All are trading for less than par ($1,000). And all ensure you will get paid… regularly… They boast a combined cash yield of nearly 8% – including one bond yielding 12.8%. To learn more about True Income, click here.

 In his latest letter to investors, Warren Buffett wrote he was going to focus future earnings growth in noninsurance businesses (a sign he expects disappointing stock market returns). And he said he was looking for another "major" acquisition…

Buffett blasted his elephant gun today... He announced Berkshire Hathaway would purchase chemical company Lubrizol for $9 billion ($135 a share, a 28% premium). Lubrizol makes chemicals for pharmaceutical companies, fuel additives for gasoline and diesel, engine oil additives, and other ingredients for the transportation sector. (You can see an entire product list here.)

 Lubrizol is a typical Buffett company: It's a market leader. It produces consistent earnings. The product is easy to understand. And its management team has been in place for a long time. "Lubrizol is exactly the sort of company with which we love to partner – the global leader in several market applications run by a talented CEO, James Hambrick," Buffett said in a statement. "Our only instruction to James – just keep doing for us what you have done so successfully for your shareholders."

 Buffett paid cash for the deal, which most commentators say is a sign he thinks Berkshire's shares are undervalued. We think it's a sign he thinks dollars are overvalued. He wants to move his dollars into inflation-beating assets ASAP. Lubrizol is the perfect example. It's a picks-and-shovels play... The company makes chemicals we need in transportation, construction, medicine, etc. It can raise prices to combat inflation (which Buffett expects).

 Buffett isn't the only big investor buying chemicals. Like Buffett, a group of leading hedge funds view these large chemical companies as another commodity... assets, like gold, oil, and agriculture that will rise with inflation. LyondellBasell, which emerged from bankruptcy in October 2009, is the most popular chemical stock among major hedge funds. The largest owners include David Einhorn's Greenlight Capital, York Capital, and Viking Global.

 In the February 24 Digest, we discussed an interview with expert resource investor Eric Sprott, of Sprott Resources. We said it was the most compelling argument to buy silver we've ever heard... In short, Sprott said the world was out of silver. You can read more here.

 It's no secret Sprott is bullish on silver. It's his single largest holding. Sure, he's talking his book. But he's also one of the best resource investors in the world. When he talks his book, it's worth listening. In a recent interview, Sprott explained why he sees silver hitting triple digits:

 New 52-week highs (as of 3/11/11): Cytori (CYTX).

 It's not too late to start buying gold and silver (if you can find any). We tell you who to contact in today's mailbag. Have you personally had trouble buying precious metals? If so, send us a note at feedback@stansberryresearch.com.

 "How do I choose a gold/silver dealer? Should I buy silver coins and/or rounds?" – Paid-up subscriber Phil

Goldsmith comment: Phil, we can't tell you what kind of silver you to buy. (We're not allowed to give personalized investment advice.) However, Van Simmons at David Hall Rare Coins (800-759-7575) and Rich Checkan at Asset Strategies International (800-831-0007) are our preferred precious metals dealers. Van's firm specializes in collectibles, while Asset Strategies International is better for bullion.

 "Since you seem to get so much backlash on your 'controversial' ideas, I just wanted to write to say that you have it right. You see deeply into what is going on and explain in a most direct fashion. I guess that's just too uncomfortable for many. I believe many more of us who subscribe do get it and prosper mightily under the tutelage of your team.

"Also want to say that True Income is my Rock of Gibraltar and really allows me to enjoy the speculation on mining stocks (courtesy of Matt B.) without losing sleep. Even with the occasional bankruptcy, it is the most stable and consistently profitable sector of my holdings. Mike Williams does his homework, and it shows!

"Keep up the good fight! Many of us out here support you; we're just busy managing all of these investments!" – Paid-up subscriber Tom Philipp

Making Sense of the 'Black List'

The most recent issue of our flagship letter – Stansberry's Investment Advisory – spawned more confusion than normal. Judging by the tone of several e-mails, some readers seem to believe we write in an effort to confuse and confound... as though our intention was to fuel your mistrust. Nothing could be further from the truth.

We wrote our last issue because we have grave concerns about the level of the stock market in relation to the troubles we see brewing. We don't think it's safe anymore. And we did our best to give you our best advice about how to manage the risks we see.

Most of the e-mails raised two questions: First, many subscribers were dismayed to find Silver Wheaton – the blue-chip silver royalty company – on our "Black List" of overvalued stocks. Dear friends, if you want to follow our advice, you'll have to learn to read the entire issue, not merely the words in the boxes. We did not say and did not mean to infer that every stock on the list should be sold. In fact, we cautioned specifically about the resource stocks on the list:

What does that mean for Silver Wheaton? Well, Silver Wheaton is a resource company (silver). So as we noted, it's valued based on the size of the reserves it "owns" through a royalty stake. That means normal measures of equity valuation aren't very useful. But it ended up on the list because, technically, it qualified. So you'll have to make a judgment call.

If you read Steve Sjuggerud's latest review of the company, you know there are sound reasons to expect its share price to go higher. On the other hand, common sense would also tell you Silver Wheaton was a much better buy at $4 in 2008 than it is today at $40. What should you do? Well... that depends on your portfolio. How well protected are you from a big decline in the stock market?

The second common question involved our suggestion that anyone unwilling to short stocks should batten down the hatches of his portfolio, going to 50% gold and 50% cash – despite our view that the currency is doomed.

Since last February our advice has been (and will continue to be) that stocks, as a whole, are expensive and don't represent great value. Given the economic risks we're facing, we have urged our readers to hedge their equity investments by selling short certain stocks. That way, if the market as a whole falls suddenly, you will make money on your short positions to cover the losses you might face on your "long" positions.

We know most of our subscribers won't sell stocks short. No matter how much success we have shorting stocks nor how easy it is to do, most people just won't do it. Frankly, we think that's just plain stupid. And we've begged our subscribers to reconsider over many, many years. But if you're one of those people who will not, under any circumstances, sell short, we have advised you to move 50% of your assets into gold bullion and 50% into cash or cash-like vehicles. (See our Friday Digest about the importance of holding cash.)

This advice seemed simple to us... but has caused all kinds of confusion in our readers. So let us repeat… Are you selling stocks short? If your answer is "yes," congratulations. Please proceed to follow our advice regarding which stocks to buy and sell.

If your answer is "no," please disregard our advice about which stocks to buy and which stocks to sell. It's not safe for you to be in the market right now. You will have to wait until at least June to see what happens when the current round of global money-printing stops. We think that will lead to a huge correction in stock prices and commodity prices. You'll be glad you've got cash ready at that point.

Why should you own any cash if you believe the dollar is going to crash? Simple. By owning 50% gold bullion and 50% cash, you are perfectly hedged and totally liquid. If the dollar falls, your gold will more than make up for your losses. If gold falls, your cash will cushion the volatility.

Look, folks... gold has gone up for 10 years in a row. It could fall to $800-$900 without even breaking its uptrend. These are dangerous and volatile times. The key to success now and for the next several years is going to be not losing money.

Buying into stocks that have gone from $4 to $40 in three years, like Silver Wheaton, is risky – no doubt about it. Yes, we're bullish on silver. Yes, we're bullish on gold. But we're not such fools to believe the markets couldn't inflict big losses on us at any time. If you're willing to hedge your portfolio by selling stocks short, you'll be fine. But if you're not... we'd recommend moving to a cash position. And since the dollar isn't reliable, you have to hedge your cash with gold.

Regards,

Porter Stansberry and Sean Goldsmith

Baltimore, Maryland and New York, New York

March 14, 2011

Time to be cautious... The best bonds to buy when interest rates rise... Buffett blasts the elephant gun... $100 silver... The government doesn't have any silver...