A calm start to the week...

A calm start to the week... Why it's too soon to say the selling is over... 'Once-in-a-decade opportunities'... The financial media agrees with Porter... The latest on the Federal Reserve and interest rates...

Following the incredible volatility of last week, markets around the world were relatively calm this morning...

U.S. stocks, as represented by the benchmark S&P 500 Index, opened near where they closed on Friday. They closed today down less than 1%. Most major markets in Europe and Asia closed within 1% of where they ended last week. Even China – where stocks plunged another 14%-plus last week – closed the day down less than 1%.

Last week, we covered the case for at least a short-term rally in stocks. But it's still too soon to assume the correction is over. As Porter explained in Friday's Digest...

I don't think this correction is finished. The real carnage hasn't even begun. This bull market was built on a few key narratives: that China's growth would propel resource prices forever... that Europe was fixed and would begin to rebound... and that the U.S. economic rebound would create a huge new wave of consumer demand. These things haven't come to pass, and the market is beginning to realize it. The big problem, which will take a long time to fix, is credit. Credit default swaps have begun to soar in price (revealing credit distress) in big, important businesses. Auto makers General Motors and Ford, energy producer Chesapeake Energy, and resource giant Freeport-McMoRan, for example, have all seen big spikes in the cost of credit protection associated with their bonds. Credit default swaps are how banks, insurance companies, and major hedge funds protect themselves from credit losses. These moves are indicative of a much tougher credit environment moving forward. These facts are going to scare a lot of investors. Some of them will panic. They will sell everything. They will go to cash.

But as Porter said, those investors are likely to miss out on "once-in-a-decade opportunities to buy high-quality businesses – the kind of investments that can multiply your capital by 10 or 50 times"...

That's why I see the idea that the market is probably going lower as good news. I'm building a big list of securities that I'd like to buy. I know that I can't time the bottom – all I can hope to do is to buy some world-class businesses at fair prices. I will only have these opportunities if other investors "panic" and refuse to buy stocks because they're afraid of what went wrong during the last cycle.

If you missed Porter's Digest explaining the two types of investor fear, and how to set yourself up to profit while other investors panic, be sure to check it out here. And if you missed last week's recommendations on the recent selloff, you can find them here.

Porter has long recommended watching the high-yield bond market for clues on where the economy and the stock market are headed. As he reminded readers in the August 14 Digest...

Every investor in stocks should be watching the chart you see below. As I've been warning since 2013, the high-yield bond market reached completely unsustainable levels thanks to the Fed's massive credit inflation. As this credit bubble deflates, "gravity" will return to our economy. Capital costs will begin to grow. Terms for credit will get tougher. The rising cost of capital will result in bad loans, bankruptcies, repositions, unemployment, softer demand, and lower securities valuations. Winter is coming, friends. You can see commodity-related credit defaults have begun to hurt the market for high-yield bonds. Record levels of subprime auto loan defaults will be next...

Now, it appears the financial media is catching on. From an article this weekend in the Wall Street Journal...

Investors already might feel they are juggling with China, the U.S. Federal Reserve, commodities and fluctuating stocks, but it is worth keeping an eye on another ball in the air: the U.S. credit market. Yields on U.S. junk bonds recently hit their highest since 2012 before edging lower to stand at 7.33%, according to Barclays indexes. They have risen by 1.4 percentage points since the start of June, and by 2.5 percentage points from their 2014 low. The weakness of the high-yield market may have exacerbated investor jitters about growth. Credit markets can be the canary in the coal mine, since investors in bonds, where potential gains are limited compared with stocks, tend to have a greater focus on downside risks.

The article noted that the "weakness" has been mostly contained to the energy and resource sector so far – as Porter has explained – but suggested investors would be wise to keep an eye on the corporate-bond market going forward...

There is good reason for monitoring developments closely from here. If global deflationary pressures build, they will be felt most acutely in the debt markets... A bigger test for credit markets may come in September, with investors back at their desks and borrowers hitting the markets again. Wider spreads and higher yields have previously been a temptation for investors more than a worry; extended weakness would be a worrying sign. Equity investors should watch closely: It could be a choppy autumn.

Following the crash in China and the recent plunge here in the U.S., you might assume the chances of a Federal Reserve interest-rate hike have plunged, too. And the market agrees...

According to the CME Group's "FedWatch" – a tool that tracks fed-funds futures prices, "which have long been used to express the market's views on the likelihood of changes in U.S. monetary policy," the CME Group explains – the current probability of a September interest-rate hike has fallen to 28% today.

The likelihood of a rate increase by year-end has fallen to just more than 50%.

But according to a report this weekend, Federal Reserve officials are "sticking to their plan" to raise rates before the end of the year. From the Wall Street Journal...

During the Federal Reserve Bank of Kansas City's annual economic symposium [in Jackson Hole, Wyoming], many policy makers signaled that stock-market volatility and China's woes haven't seriously dented their view that the U.S. job market is improving, and that domestic economic output is expanding at a steady, modest pace. Inflation might remain low for longer thanks to falling oil prices and a strong dollar. Officials will continue to keep a close watch on markets and China. But they hope U.S. consumer-price inflation will start inching toward their 2% annual target as the economy's untapped capacity gets used up, leaving them in position to start raising rates after several months of forewarning. "There is good reason to believe that inflation will move higher as the forces holding inflation down – oil prices and import prices, particularly – dissipate further," said Fed Vice Chairman Stanley Fischer in comments delivered to the conference, which ended Saturday. The Fed has said it will raise rates when it is reasonably confident the inflation rate will rise again to 2%.

In particular, the article suggests most Fed officials still think it's time to raise rates...

Inside the Fed, advocates for holding off a rate boost beyond this year aren't getting much traction. In Jackson Hole, Minneapolis Fed President Narayana Kocherlakota was an isolated voice among officials for sustaining near-zero interest rates... Officials gathering in Jackson Hole were comforted by the market's rebound and also its generally smooth functioning during a spasm of volatility. They noted investors were largely able to meet demands for cash to bolster funds they had borrowed for investments, in what is known as a margin call, without setting off a spiral of selling. Officials also said they saw few signs of stress in banks, brokers and others. "The dog that hasn't barked in the wake of recent market turbulence has been any hint of distress at any major financial institution," said Mark Carney, governor of the Bank of England. The U.K.'s central bank also expects to stick to its plan to raise interest rates in the coming months, perhaps early next year.

And it's not just Fed officials who believe it's time to raise rates. According to financial news service Reuters, central bankers from around the world are encouraging the Fed to follow through with its plan, too...

In private and in public at last week's global central banking conference in Jackson Hole, the message from visiting policymakers was that the Fed has telegraphed an initial monetary tightening and, following a year-long rise in the dollar, financial markets globally are as ready as they can be. The powerful group gathered at the end of a roller-coaster week in markets in which the Dow tanked by 1,000 points on Monday on concerns of a slowdown in China but recovered to trade higher by the end of the week. Remarks by Fed officials that liftoff could come in September were blamed by some for that volatility. But for Agustin Carstens, the top central banker in Mexico, a rate hike by his neighbor sends an encouraging sign of economic health, even if it does force growth-challenged Mexico to also raise rates within days. "If the Fed tightens, it will be due to the fact that they have a perception that inflation is drifting up, but more important, that unemployment is falling and the economy is recovering," Carstens told Reuters in an interview. "For us, that is very good news," he added.

Regular readers know we believe the conventional wisdom on stocks and interest rates is wrong.

In short, a Federal Reserve rate hike isn't necessarily bad for stocks. In fact, history shows it's often bullish over the longer term.

But the uncertainty of the move could weigh on markets ahead of the Fed's meeting on September 17. Don't be surprised to see volatility pick up again over the next few weeks.

New 52-week highs (as of 8/28/15): none.

A bit of praise in the mailbag, along with a question about trailing stops. As always, send your questions and comments to feedback@stansberryresearch.com. Please note, we can't answer them all, but we read every e-mail.

"The Stansberry team has been great throughout. I stuck to my Stops and exit plan for multiple positions while not going with the Smart Trailing Stop Out for one of my major financial sector allocations. In some cases, I did partial downsizing and plan re-entry for several. Appreciate your expertise, advice and perspectives." – Paid-up subscriber Nancy

"One of the things that is always emphasized by Stansberry Research is being able to sleep at night. There is always so much emphasis placed on investing wisdom and safety. Lately, because of the direction change in the markets I am sure that there are many that have been losing sleep or cashed out in fear.

"I want to thank you all for every good night's sleep I have had lately. I especially want to thank you all for teaching me that sell-offs are a good thing rather than a bad thing. Shopping for bargains has become one of my favorite things. As a subscriber you have given me and my family so much that I can't thank you all enough for. Special thanks to Doc for doing tonight's event. I am sure that it will be well worth my time. All of the events that you give to us are so very important." – Paid-up subscriber Jeff Spranger

"I am a subscriber to several of your services and a TradeStops user. Over the last 2-3 days, a number of my positions hit their stops and email alerts were sent to me. Because of work schedule and meetings, I was unable to get the trades executed. I don't set up automatic orders, as I wait for the TradeStops alert before executing a trade, which I believe use closing prices.

"After the big up day today, several of those positions are now above the trailing stop levels. My question is if you have a recommendation on whether to go ahead and execute the sell orders now, or leave the positions in place, since they are no longer below the trailing stop price? Thanks for your assistance." – Paid-up subscriber Steve

Brill comment: As always, we can't give individual investment advice. But we believe it's important to be disciplined when following your stops. That means sometimes you will be stopped out, only to see that stock or position reverse and move higher. That's the "cost" of protecting your capital... But as the saying goes, "Opportunity is infinite, capital is not."

That said, what you do now is up to you. As we discussed last week, you might consider the recent rally a "gift" that allows you to sell those positions at higher prices than you would have received otherwise.

Of course, you could also just proceed as if the selloff didn't happen, and continue holding with the same trailing stops. But remember, the reason we recommend trailing stops is to remove all emotion from investing. So proceed with caution if you decide to use this strategy.

Regards,

Justin Brill
Baltimore, Maryland
August 31, 2015