What to think of 'the greatest business in the world' today...

Where money will flow when bonds crash…

 This month, I (Porter) said the bull market in bonds is over.

So if investors begin fleeing bonds as interest rates rise, where will the money go?

 First, I think that money will go to cash... And I think that's exactly what you've seen so far with the huge moves in various currencies and the strengthening of the dollar.

And it might sound paradoxical to say I believe that the dollar is going to be replaced as the world's reserve currency and also that I believe the dollar is going to strengthen in the near term.

But our monetary system is akin to a giant rat hole. There is no safe corner. There is no safe place to stand. There is no safe place to put your money.

If you put your money in gold, you're putting it in something that is very hard to physically obtain, transport, and store. And it can be very illiquid. If you put your money into the Swiss franc, well… the Swiss government has promised to print you out of it. If you put your money into the euro, you've ended up with not only an "IOU nothing" (aka the dollar), but you've ended up with a "who owes you nothing." At least the dollar is backed by the "full faith and credit" of the U.S. government… whatever you make of that. But who stands behind the euro?

So the dollar ends up being the most liquid, least-worst option. And that's why in times of stress – like we're currently experiencing – you should expect to see the dollar rally.

 However, I expect this strength will be short-lived... As the markets begin to crash, the yield on 10-year Treasurys begins to soar, and U.S. bonds begin to falter… Federal Reserve Chairman Ben Bernanke will have no choice but to extend and even increase the amount of purchases he's making (currently $85 billion a month).

And that is the trap. That's the final sign that all this – all these bad debts accumulated over the last 40 years – can only end at a giant inflation.

 When you see Bernanke step back into the markets to control the selloff in bonds, the dollar will crash. People will finally see that all this guy can do is print more money, and that's all he will inevitably do. Of course, printing money doesn't solve any of the problems. It just changes who pays for the problems. And instead of these debts being paid for by the people who borrowed them, these debts will be paid by everyone who uses the currency. And that includes all of our foreign creditors.

Believe me, our foreign creditors have no desire whatsoever to help us pay for our debts by suffering a massive inflation. So they will begin to dump our bonds in even greater quantities… which will cause the Fed to print even greater amounts of money…

That's how this thing will all fall apart.

– Porter Stansberry with Sean Goldsmith

Where money will flow when bonds crash…

As the bond market continues its decline, Porter predicts where we'll see cash immediately flow But don't follow it… Porter says it's a trap…

To continue reading, scroll down or click here.

Where money will flow when bonds crash…

As the bond market continues its decline, Porter predicts where we'll see cash immediately flow But don't follow it… Porter says it's a trap…

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

What to think of 'the greatest business in the world' today... A peek at Porter's Insurance Value Monitor... Great feedback for Altucher...

Editor's note: Porter is traveling today. He will return to regular Digest duty next week.

 In the June 25 Stansberry Data, Porter and his research team shared their current view on the "best business in the world" – property & casualty (P&C) insurers. We received tons of great feedback about the research. So in today's Digest, we're sharing this research with you...

But first, we'd like to explain why Porter believes so strongly in investing in these businesses…

 The best insurance companies make sure the fees they charge for capital are in excess of the risks they accept by extending insurance. Well-run insurance companies make a profit on their underwriting. They earn money by taking capital from their customers.

It's incredible. These firms compound their equity by simply opening their doors every morning. They don't have to do anything else. There's nothing else in business like it. As legendary investor Warren Buffett, whose holding company Berkshire Hathaway was built in large part on P&C investments, explained in his 2011 letter to shareholders...

In other words, these insurance companies are paid to use capital.

 Most people lump all insurance companies together. But this is a mistake. The two main types of insurance businesses are life insurance and P&C. And they're very different businesses.

The two types of insurance differ on three key variables that make up any insurance contract:

With life insurance, the "whether it will happen" variable is moot... Everybody dies at some point. The "how much" variable is also known. It's the value of the policy. The only unknown is "when"... and actuaries are good at predicting this.

On the other hand, with a P&C contract, all three of these variables are unknown. So underwriting becomes much more critical with P&C... There's a lot more leeway in the underwriting decisions P&C companies can make. With this leeway comes huge differences in underwriting profitability. Some companies have simply proven they are much better at underwriting than others...

When you add up all these factors, you'll generally find that good life insurers will enjoy steady returns, while a good P&C insurer's returns will be "lumpy." But overall returns for good P&C insurers are higher than overall returns for life insurers.

 Let's say John Doe wants to buy a life insurance policy... The life insurance company has actuaries that estimate when Mr. Doe will die. Let's say the insurance company expects Mr. Doe to die in the third quarter of 2040.

This life insurance company will perform the same due diligence on every policyholder... And it aggregates the predictions, so it has an estimate of what it will owe in death benefits in the third quarter of 2040. It's a matter of statistics. Let's say the life insurance company predicts it will need $100 million in the third quarter of 2040.

That company's investment managers will then buy fixed-income investments that will guarantee $100 million of interest payments and maturities in the third quarter of 2040. So this insurance company is locked into a long-duration bond portfolio. (And it's often further limited by what rating and type of bonds it can buy.)

 P&C insurers have much more leeway with what they can buy... For instance, Markel, a top-notch P&C firm, has about 41% of its investment portfolio in equities right now. P&C insurers can also focus on shorter-duration debt. So these firms are much better suited to handle an increase in interest rates than life insurers.

In fact, P&C insurers are hoping interest rates increase... Then they'll be able to invest their float at higher returns. Warren Buffett went on record in his 2012 letter to shareholders welcoming higher rates…

 Porter recommended a slate of P&C insurance stocks to his Investment Advisory subscribers last year. All of those positions are up between 17% and 38%.

So this week, Porter and his team analyzed for Stansberry Data subscribers how these positions may fare in the bear market Porter has predicted. Here's what they wrote...

 In the most recent issue of Stansberry's Investment Advisory... we noted several warning signs could be signaling the end of the world's central banks' ability to prop up asset prices with money printing ("easing") and super-low interest rates. If so, we could be entering a painful period for the global economy...

In periods of economic uncertainty, the market tends to arbitrarily sell off everything. P&C stocks could suffer from this kind of selling if interest rates start to rise – a fear if central banks rein in their current monetary policies... or if those policies stop working. As we wrote, we think this would be an overreaction...

Fear of higher long-term interest rates is a huge risk for life insurers, whose business strategies require massive portfolios of long-dated bond portfolios. In contrast, P&C bond portfolios have much more flexibility.

 We have six P&C insurers in our portfolio. The average duration of the fixed-income component of these six insurers is less than four years. Even if interest rates bounced up by an entire percentage point (100 basis points, in industry parlance), we estimate that the balance sheets of our P&C companies would suffer only a 1% dip in book value. And after three to four years, these companies could roll their entire portfolio back over into bonds with higher interest rates.

This week, we analyzed how our favorite P&C companies have fared since 1990 – a period which included two significant stock market downturns...

The results are summarized in the chart below. Of our 10 higher-ranked P&C companies, eight were actively traded in 1990. If you had invested $100 into each of these companies in June 1990 and reinvested the dividends, your initial $800 investment would be worth more than $12,000 today. This equates to a 1,400% total gain, or more than 13% per year.

These are phenomenal returns, especially when compared with reinvesting dividends in the S&P 500 over this same time frame (600% total gain, or about 8% per year).

Investing in quality P&C companies may be the single best way to grow wealth over time. But you must be prepared to ride out some bumps along the way.

 To illustrate, let's go back to our hypothetical $800 investment in June 1990. By June 1998, that initial investment would have grown to more than $3,400... a return of more than 330%. However, by September 1999, your investment would have dropped back down to $2,300, a fall of more than 30% from the June 1998 highs. In fact, the eight-stock portfolio needed two years (until 2001) to recover to June 1998 levels.

A similar slump happened during the financial crisis of 2007-2008. By June 2007, the initial $800 investment would have grown to $7,900... a gain of nearly 900%. But over the next 24 months, the investments' value would have dropped to less than $5,900, a 25% loss. Of course, today, that eight-stock portfolio would have recovered all those losses... and then some.

 The point is, P&C insurers are not invulnerable to big economic headwinds. P&C stocks suffered from 1999 to 2001, when investors sold off traditional blue-chip businesses to snatch up overvalued dot-com stocks. And again, the sector slumped during the financial crisis of 2007-2008.

However, the overall trend was positive. Over the longer term, these stocks plowed higher. Patient investors recovered from temporary setbacks.

 Please note… we are not "calling the top" for our P&C insurers. We are simply urging readers to be cautious about adding to positions with the market at these levels and the macroeconomic uncertainty.

If you own these stocks, continue to hold them. And watch your trailing stops... These will protect your capital if the sector sells off too sharply.

But as the chart above shows, history is on our side. If you can ride out the corrections, P&C insurance is still "the best business in the world" for long-term investors.

Editor's note: Stansberry Data is a new service Porter launched for certain Stansberry's Investment Advisory subscribers. In addition to receiving regular analyses of the P&C insurance sector, Stansberry Data also publishes detailed data Porter and his team use to monitor the oil and gas industry, companies that control one-of-a-kind "Trophy Assets," and the most capital-efficient businesses in the stock market.

Stansberry Data is only available to existing Investment Advisory subscribers. If you'd like to sign up for Porter's newsletter, you can do so here... And it's at absolutely zero risk to you. We offer a 100% refund. On Monday, we'll tell you how you can sign up for Stansberry Data.

 New 52-week highs (as of 6/27/13): Ligand Pharmaceuticals (LGND).

 Have you read James Altucher's book Choose Yourself yet? It's received rave reviews... And we'd like to hear your thoughts on the book. Let us know at feedback@stansberryresearch.com.

 "Whilst listening to your intro of James Altucher, I was thinking 'gee Porter, don't you have more important matters at hand to deal with?' Not being a college educated kind of guy or a member of the 'book of the month club,' and with fewer railroad tracks in front of me than behind me, I just can't properly express what a great surprise it was to start reading one of Mr. Altucher's articles!

"I ordered because I thought you might be helping out some ole' hack buddy of yours? 'What a nice thing Porter is doing!' 'These days we need good people doing good stuff,' I thought! Far from it! This guy is fabulous, interesting, and of course intelligent, but I just loved the way he humbly puts so much wisdom into his work! He's not afraid to laugh at a few mistakes along his career path which makes him real! I can't wait for my hardback! – Paid-up subscriber Terry W.

 "Enjoying James Altucher! Candid, enlightened clarification and totally irreverent approach to fresh thinking of old assumed pathways of our lives." – Paid-up subscriber Turner Truitt

 "Just finished reading "Choosing Yourself". Porter, thank you, thank you. May never have found the book on my own. Your $23.95 package is a steal. God bless you." – Paid-up subscriber AR

 "Altchuers book joins Think and Grow Rich and Atlas Shrugged as must reads. Young people could save $200,000 (college tuition these days) by reading these three books." – Paid-up subscriber Jack Till

Goldsmith comment: We're receiving loads of great feedback about Choose Yourself. Porter enjoyed the book so much, he decided to purchase thousands of copies to share with our readers. We actually sold out in the first two days. But we've ordered another batch. To make sure you don't miss out on this book, order your copy here...

Regards,

Sean Goldsmith
June 28, 2013
Miami Beach, Florida