Mon, Aug 5, 2013|Sean Goldsmith

Who will take over the Federal Reserve?...

In last Friday's Digest Premium, I (Porter) explained how rising interest rates (which I believe are an economic certainty) will crush the stock market...

And I would advise everyone to look at his portfolio and figure out what those stocks would be worth if interest rates (as measured by the 10-year Treasury yield) were at 4% or 4.5% instead of today's rate of 2.5%. What about if interest rates were at 6.5%? Answer those questions, and you'll do a good job positioning your portfolio going forward.

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...

So if you believe, as I do, that interest rates will increase in the future... How do you craft a portfolio?

The best example of a safe portfolio today is our latest S&A 16 Model Portfolio.

We wrote an entire Digest about the S&A 16, which you can read here. In short, it's a quarterly, diversified portfolio of investments (usually 16 in all) chosen from across all S&A portfolios that we believe will outperform the market over the next 12 months.

And the portfolio always has four components – Value, Growth, Income, and Macro.

We make these portfolios available to our highest-level subscribers, the S&A Alliance members.

I can't give away our picks from the most recent S&A 16, but I'll give you some insight into our thinking this quarter.

We've got a lot of cash... that's to "keep our powder dry" so we'll have capital to deploy when a market downturn makes many of our favorite stocks cheap.

And we're investing in megatrends that we believe will profit regardless of the micro environment. That means we have a lot of exposure to energy and the new boom in American oil production.

And we have a lot exposure to technology, specifically technology that's moving computing outside of the PC. We see the next big advances in computers and consumer items to be stuff that's outside the PC. So you've gone from the PC to the tablet and the cell phone. I think you will see technology continuing to get even smaller and even more integrated into more common items.

We're also hedging our portfolio with some short sales.

Hopefully, this gives you some idea about how to construct a safe portfolio to protect yourself from rising interest rates. And if you'd like to find out about joining the Alliance and gaining access to the S&A 16, you can call our head of sales, Michael Cottet (888-863-9356).

– Porter Stansberry with Sean Goldsmith

A portfolio that will protect you from rising interest rates...

On Friday, Porter described how rising interest rates would devastate the value of stocks… In today's Digest Premium, he describes his ideal portfolio to protect yourself from rising interest rates – a phenomenon he believes is certain to happen in the near future.

To continue reading, scroll down or click here.

A portfolio that will protect you from rising interest rates...

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

Who will take over the Federal Reserve?... Miners starting to hedge production... Ackman accusing Soros of insider trading... More book recommendations...

The man we all have to thank for the wonderful stock-market rally since 2008 – Federal Reserve Chairman Ben Bernanke – will leave the Fed at the end of the year.

His willingness to bring interest rates to zero and print trillions of dollars has boosted asset classes across the board. The S&P 500 hit an all-time high last week. But with his looming departure, will this artificial rally last?

The folks in line to potentially replace Bernanke are Janet Yellen (vice chair of the Federal Reserve Board of Governors), Larry Summers (former Harvard president and Treasury secretary under President Clinton), and Donald Kohn (a 40-year veteran of the Federal Reserve).

All three candidates are government cronies... products of the system. And we have no doubt that all three candidates would carry forward with Bernanke's quantitative-easing policies. These folks still believe ever-expanding debt is the way to save an economy.

We disagree... While inflated asset prices feel good in the short term, we know how this story ends.

In today's edition of his e-letter Diary of a Rogue Economist, Bill Bonner weighed in on the candidates to take the Fed's top spot. And it's priceless...

Bill, if you're not familiar, is the founder of Agora Inc. – the parent company to Stansberry & Associates. He's also a mentor to S&A founder Porter Stansberry. After decades in this business, we still consider Bill one of the sharpest wits in financial publishing. We hope you enjoy this excerpt from his most recent piece:

The worst of these candidates is Larry Summers. That is why he is most likely to get the post.

Summers is so often described as "brilliant" that we are beginning to wonder about the word itself. Perhaps it's coming to mean something else.

Maybe "brilliant" is coming to mean "not quite bright," which would better describe Larry Summers. He is the Tom Friedman of the financial world – always sure of himself, always with an answer to every problem... and always mildly retarded...

Bill finishes his piece by nominating a "dark-horse" candidate to lead the Fed...

We alone among the candidates have the qualities needed to avoid the financial disaster coming our way. We alone understand the proper and modest role of central banking. And we have our plan of action already worked out.

Immediately renounce President Nixon's currency system. Put in place in 1971, it is now living on borrowed time and borrowed money.

Fix the dollar to gold at the present gold price.

Stop [quantitative easing], [zero interest-rate policy] and all other attempts to manipulate prices, interest rates, and markets.

We will not be swayed from our course by political pressure. (Not that we are high-minded in any way. We just don't give a damn.)

That is, we wouldn't wait for Humpty Dumpty to get higher up on the wall. We'd give him a push. Get it over with.

Bill's Diary of a Rogue Economist is one of the few non-S&A pieces we read every day. We'd encourage you to sign up to receive his free daily e-mail here...

In another sign we're approaching the bottom in gold... Gold miners are starting to hedge their production again. To hedge, a miner simply sells its future production at locked-in, current prices. It's a way to protect the company from price decreases.

"We're seeing more genuine hedging in gold than we have for some time," Martyn Whitehead, Barclays' head of metals and mining sales, told the Financial Times. The newspaper also quoted a recent note from French investment bank Société Générale to clients, saying miners were "queuing [up] to bullion banks to discuss short-term hedging arrangements."

If history is any indicator, miners' hedging activity happens at the exact wrong times. Take a look at this 20-year price chart of gold...

As you can see in the chart above, miners started hedging production in the late 1990s, just before a massive bull market in the metal. And they cut their hedges to almost zero in 2011, right around peak gold prices.

Even the gold experts aren't immune to gut-wrenching price declines and euphoria at record-high prices.

We're still early on this trend, but it's worth noting... "In the last three to six months, we have seen more hedging activity in gold than we've seen in the last three to five years," Whitehead said. "I would estimate 1.5 [million] to 2 million ounces have been hedged globally."

In the July 31 Digest Premium, Porter shared his thoughts on hedge-fund manager Bill Ackman. Ackman has made headlines recently for his very public short sale of the multilevel-marketing supplement company, Herbalife. Ackman sold short $1 billion in shares... And he's down around 60% on the position.

Ackman also recently announced that he has raised more than $2 billion to buy shares of Air Products & Chemicals, the world's largest supplier of hydrogen and helium. He wouldn't tell investors which stock he was buying while raising the funds.

The last time he did this was in 2007. He raised money to buy shares in national retailer Target. And investors lost 90%. In Digest Premium, Porter called out what he saw as Ackman's hypocrisy...

[Ackman] made a big deal about the supposed ethical shortcomings of a company called Herbalife. He pointed a finger at the folks who run Herbalife and called the business a pyramid scheme. He made fun of the fact that it sells lotions and potions in a network-marketing arrangement.

I felt like Ackman's stand involved some ethical posturing. He was holding himself out as a moral judge of another man's business. That really bothered me. I don't like people like that. And I wouldn't do business with them, either.

It's troubling that Ackman can so easily point a finger at Herbalife and say, "I don't approve of these people. And I'm going to try to hurt their business interests by publicizing the things I don't like"... that he can trash the company publicly simply in an attempt to make money as a short-seller. Yes, I'm aware he's donating any profits to charity... but that's beside the point.

In the meantime, Ackman has the gumption to do something preposterous... raise money from people (who really should know better) to buy a single stock.

Ackman's Herbalife pains continued last Wednesday... The stock soared to new highs after investing legend George Soros took a large position in the company.

Now, Ackman is petitioning the Securities and Exchange Commission to investigate Soros for allegedly breaking insider-trading rules by letting other hedge funds know about his Herbalife position... Ackman says he hasn't covered any of his shorts. Meanwhile, he's engaged in public battles with Carl Icahn, Dan Loeb, and George Soros... three heavyweight fund managers who are all long the stock.

New 52-week highs (as of 8/2/13): ProShares Ultra Nasdaq Biotechnology Fund (BIB), Bemis (BMS), Cisco (CSCO), Fluidigm (FLDM), 1st United Bancorp (FUBC), Hershey (HSY), iShares Nasdaq Biotechnology Fund (IBB), Johnson & Johnson (JNJ), Marvell Technology (MRVL), PowerShares Buyback Achievers Fund (PKW), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), and Union Pacific (UNP).

More book recommendations filtering in... Send your comments, criticisms... and Federal Reserve Chairman nominations to feedback@stansberryresearch.com.

"Thanks for all the book recommendations that you have given over the years through your publications. I read at least a book a month and can't thank you enough for recommending Choose Yourself by James Altucher.

"Now I'd like to give a recommendation to return the favor. I just finished the most interesting thing I've read in some time, it is Life by Keith Richards. Yes, the same Keith Richards from the Rolling Stones.

"This may sound like an unusual pick, but the total honesty that Keith Richards writes with reminds me a lot of you. It has plenty of great stories and if you are any bit of a music fan you will find it fascinating. But aside from those given topics of women, drugs, and music of all sorts, it also has a lot of history and psychology. And surprisingly it touches on a lot of themes that you and your colleagues are interested in.

"One quote that I had to go back and repeat for you is:

I could never believe that the British Empire would want to pick on a few musicians. Where's the threat? You've got navies & armies and you're unleashing your evil little troops on a few troubadours? To me, it was the first demonstration of how insecure establishments and governments really are and how sensitive they can get to something that's trivial, really. But once they perceive a threat, they keep looking for the "enemy within" without realizing that half the time they're it.

"What was interesting is that he grew up and got started in London in the period after World War II when Great Britain was having severe economic trouble. He talks about how they had shortages of basic things when he was growing up. The world he grew up in was changing from that of previous generations but nobody really knew how or why or in what direction. He had a sense of what worked for his parents and grandparents wasn't going to work for him (sound familiar to today?) I remember reading your writing about how Great Britain fell from being the world superpower during the 20th century and reading this through that lens was eye opening.

"Keith Richards is also kind of an original 'Choose Yourselfer' who couldn't fit in with the establishment. I noticed some similarities in this that were very relevant to James Altucher's ideas. When the government did away with mandatory military service right before he graduated, he decided to use those extra years to get to be a great guitar player and then be in the best blues band in London. To him everything was about the music until drugs got too into the mix. But eventually he kicked that.

"Other background themes of interest are needing to leave Britain for tax reasons (due to ridiculously high tax rates) and being constantly watched by authorities due to their drug problems, traveling the world, needing to relocate to France, then going to Jamaica and Switzerland, and eventually to the United States. The border crossings were often a problem. He also has some interesting comments on politics and the criminal justice system.

"I actually got this book as a book on cd. (It is read by Johnny Depp). I don't know if you ever listen to books on tape, but I try to always have one going in the car when I'm driving by myself. It's an efficient use of my time. Hope you get the chance to read this one." – Paid-up subscriber Steve

Regards,

Sean Goldsmith
Baltimore, Maryland
August 5, 2013

A portfolio that will protect you from rising interest rates...