As fearful as September 2008...

As fearful as September 2008... Puerto Rico is in crisis again... Doc's latest thoughts... 'Extreme volatility' in China... What Steve is thinking now...

We never recommend giving too much weight to any single investment indicator, but if the "Fear and Greed Index" is right, the recent selloff in U.S. stocks is likely overdone...

The index is a combination of seven well-known market indicators compiled by CNN Money. It includes measures like volatility, stock price momentum, the number of new highs and lows, the ratio of put options to call options, and the "spread" between yields on investment-grade bonds and junk bonds.

This "super indicator" is measured on a scale from 0 (extreme fear) to 100 (extreme greed), with 50 being "neutral." A low score means investors are unusually fearful, which is usually a bullish sign for stocks. (To learn more about investor sentiment, check out this classic interview in the Stansberry Research Education Center.)

The measure currently sits at 11, indicating we're in a period of "extreme fear." For comparison, the website notes this is nearly the same level (12) the indicator hit on September 17, 2008... at the peak of the financial crisis.

Regular readers know our stance on the market: We're cautiously bullish on stocks today.

No one knows for certain where stocks are headed next. But history says extreme investor fear is usually a sign of a bottom in a market, not a top.

Speaking of fear, Puerto Rico is making headlines again...

Longtime subscribers may remember the U.S. commonwealth's debt worries first spooked markets in late 2013. In short, Puerto Rico owed more than $70 billion in debt and was having trouble servicing it. The news followed Detroit's bankruptcy that summer and only worsened the selloff in municipal bonds that year.

The island has managed to get by the past couple years by cutting spending and borrowing even more, but a new report this week suggests the end could be near. From an article in the Wall Street Journal...

The price of some Puerto Rico bonds sold last year touched record lows at about 68 cents on the dollar Monday after the government released a report by former International Monetary Fund officials calling for talks with bondholders about taking losses, including extending the time frame of some debt and lowering payments...

In a speech Monday, Gov. Alejandro Garcia Padilla called Puerto Rico's debts "unpayable."

"Let me be clear: This is not about politics. This is about math," he said.

As we mentioned recently, our colleague Dr. David "Doc" Eifrig has been one of the most outspoken bulls on municipal bonds over the past few years.

Following the news on Puerto Rico in 2013, Doc told readers the selloff in muni bonds was actually a great investment opportunity. As we noted in the December 12, 2013 Digest...

Detroit went bankrupt and Puerto Rico is on the verge of defaulting on $70 billion of muni bonds. People are fearful of increased defaults... Plus, muni bonds are selling off due to fears of rising interest rates and the Federal Reserve's potential tapering of its monthly bond purchases.

But Doc Eifrig says these fears are overblown. Doc's favorite municipal-bond funds are well-diversified. They'll survive even in the case of a large municipal bankruptcy. Plus, over the past 40 years, investment-grade muni bonds have defaulted just 0.017% of the time, according to Forbes. That's less than two times out of every 10,000.

Doc says the selloff is temporary... and makes munis even more attractive. Right now, you can lock in tax-equivalent, double-digit yields in select muni-bond funds. And despite market fears, it's still one of the safest corners of the fixed-income market.

Of course, we know now that Doc was exactly right. Given the news today, we asked him for an update. He shared his latest thoughts with us in a note this morning...

After months of back and forth, Puerto Rico's governor has admitted the island can't pay its $72 billion in bond debt. The U.S. territory has more municipal-bond debt per capita than any U.S. state. Based on a population of 3.6 million, each inhabitant owes more than $20,000. Just to pay the interest, every person owes $310 a year. That's a lot on an island where the average annual income is $19,518 and the unemployment rate is 12.4%. This was essentially a foregone conclusion.

The news spells hard times for Puerto Rican citizens. The government commissioned a report from the World Bank's former chief economist to find a way to fix the situation. It includes reducing the minimum wage, cutting welfare benefits, raising taxes, and restructuring debt. Since the island is just a territory, it doesn't have access to the Chapter 9 bankruptcy process like U.S. states, leaving the entire situation in legal limbo. Borrowing to pay back your borrowing for years at a time simply doesn't pay off.

But while the news is bad for Puerto Ricans, Doc says it's not a concern for most muni-bond investors...

While Puerto Rican bonds are trading around 70 cents on the dollar, the larger municipal-bond market is unscathed. Crises that happen in slow motion are easily contained. Most municipal-bond mutual funds have already gotten out of Puerto Rico. Your muni funds should be doing just fine, but you can check their exposure at the fund's website to be sure. And you can see a list of highly exposed funds right here.

The real losers in this deal are the bond insurers. MBIA, Assured Guaranty, and Ambac Financial are down anywhere from 10% to 25% since Friday. These companies write insurance contracts to "wrap" municipal debt and allow low-rated bonds to be rated as "safe."

These companies also got demolished when they started insuring mortgage-backed bonds at the exact wrong time prior to the housing crash. These are classic "earn $1 a day, then lose $100 at once" businesses. And it goes to show that you can't spin junk into gold. At the same time, a diversified municipal-bond portfolio performs much better and returns tax-free income.

We recently "doubled down" on our favorite municipal-bond fund in Income Intelligence because market fears have offered a great entry point.

Interested readers can get Doc's latest muni-bond recommendations in the June issue of Income Intelligence. Click here to take advantage of a 100% risk-free trial offer.

Meanwhile, the wild ride in Chinese stocks continues...

As regular Digest readers know, we've kept a close eye on Chinese stocks ever since Steve Sjuggerud turned bullish last year.

In December, we noted that Chinese stocks were the best-performing market in 2014... and discussed the catalysts that could push them even higher. In short, the Chinese government wanted to push stock prices higher. It took a page out of former Federal Reserve Chairman Ben Bernanke's playbook and eased investor regulations, launched its own version of quantitative easing (QE), and lowered interest rates multiple times.

The Fed's efforts have sent the benchmark S&P 500 Index up more than 110% since it first launched QE in November 2008. China's efforts have worked, too... and quickly. China's version of the Fed – the People's Bank of China ("PBOC") – has helped push the Shanghai Composite Index up more than 100% in the last year alone, despite a steep pullback this month...

Last week, we noted that Steve was seeing signs of a bubble and expected Chinese stocks to be extremely volatile going forward. From the June 23 Digest...

Bubbles always end... but you don't know how much higher they will go, or when they will pop...

The ride in Chinese stocks will likely be extremely volatile – and potentially extremely profitable – over the coming years. But we can't know that for sure. That's why I urge you to follow our trailing stops closely. Please sell when it is time to sell.

Keep in mind, the Chinese market can do crazy things... The CSI 300 index was at 2,000 at the beginning of 2007. At the end of 2007 – just 12 months later – it was around 5,000. Twelve months after that, it stood at 2,000 again.

And action this week certainly qualified as "volatile"...

Yesterday, Chinese stocks plunged as much as 7.6% before closing down 3.3%. And today, they staged an incredible reversal...

After falling as much as 5.1% in early trading, the Shanghai Composite Index reversed by more than 430 points – its largest intraday swing since 1992, according to Bloomberg. The index closed up 5.5%, its best day in more than six years.

The move was credited to several big announcements from the government aimed at calming markets...

Policymakers announced they would allow state-controlled pension funds to invest up to 30% of their assets – or roughly $100 billion – in Chinese stocks. In addition, China's securities "watchdog" said an "excessively fast correction" was not good for the market... and the Asset Management Association of China issued a statement saying, "Beautiful sunlight always comes after wind and rain," urging investors to "seize the investment opportunity" after the recent pullback in stocks.

As we mentioned earlier, Steve isn't worried about the volatility in Chinese stocks. In today's edition of our free DailyWealth e-letter, Steve explained further, noting the similarities between China and another super-profitable recommendation he made...

Readers who followed my advice could have made more than eight times their money since 2012 in a simple biotech fund. And just like in China, we don't know when the big trend in biotech is going to end.

So how have we done it? We're willing to sell... And we're willing to get back in again... That's how we've made a total of more than eight times our money in biotech so far since 2012.

Steve explained the "secret" to 700%-plus gains is simple: Identify a big trend, don't be afraid to sell when the trade goes against you, and be willing to buy back in when it resumes.

That's exactly how he has traded biotech stocks. True Wealth subscribers who followed Steve's advice on biotech would have turned every $10,000 into more than $82,400 since January 2012. As he explained...

When the trade went against us, we sold. And when the boom kicked in again, we got back on board. We left our egos at the door. This is the strategy you need to use in China today. And yes, I do still like China...

Steve reminded readers that despite the volatility in Chinese stocks today, the "big trend" in China is still up...

First, $400 billion will inevitably flow into Chinese stocks in the coming years, according to MSCI, the leader in world stock market indexes. Second – and perhaps more important – is the upcoming meeting for the International Monetary Fund (IMF) this October.

Steve believes this meeting could cause an incredible and powerful shift in the international currency markets, dramatically changing China's global status and triggering one of the most profound transfers of wealth in our lifetime. As Steve says...

This announcement will start a domino effect that will basically determine who in America gets rich in the years to come... and who struggles.

Consider this your warning.

If you understand and know how to position yourself for what is about to happen, almost NO other decision you make with your money will matter.

Steve recently sat down for an interview in Washington, D.C. to explain what's going on. If you haven't seen it, we urge you to take a few minutes to understand the details of a story most Americans have never heard. You can watch Steve's interview for free by clicking here.

New 52-week highs (as of 6/29/15): none.

In the mailbag, a reader shares his thoughts on yesterday's warning. Send your questions and comments to feedback@stansberryresearch.com.

"Been in the investment biz since 1970 – of course U.S. citizens will be caught except for the 60-70-80% who have nothing, or their only touch with a bank is a debit on credit card. The rest of the working stiff group cannot believe what is actually happening. Waiting till executive branch changes – as if that will help.

"In the 1960s I had trouble convincing my coworkers – some very smart engineers – that there was inflation at all – we were growing so quickly that 1-2% inflation was lost. LBJ violated the 'guns – butter' rule, but few understood Econ 101 – or cared. The quiet inflation signal was the 'coppertizing' of our coinage in the late 1960s – few stashed the good silver coins. Recall August 1971 – the loudest inflation notice ever – and the U.S. citizen did little to protect their wealth.

"Actually a few of my clients began to buy local farmland in the early 1970s – starting to see a little of that lately. Opening the gold window to U.S. citizens resulted in muted clamor. I am having difficulty convincing my sons that by taking cash out of the bank and burying it in a tin can costs them nothing in lost income, and is a gain in privacy. Just marked my 35th year of writing a weekly investment column, and can relate that my readers are blissfully procrastinating – even though they know they should take some action.

"A parting ugly thought on Greece – What if Russia figures out that buying a country is easier than invading? They would get a lemming populace, and the seaports they value too! Ugly No. 2 – POTUS figures out how to postpone 2016 election via a crisis route? Who would stand up against him?" – Paid-up subscriber Dave Kamm

Regards,

Justin Brill

Baltimore, Maryland

June 30, 2015