Reiterating a few of our key warnings...

A lot of the commentators on the scene today – including several of the analysts we employ here at Stansberry & Associates Investment Research – are bullish on the stock market.

 

As you may recall, I am not. I believe that securities prices at some point in the near future will suffer a serious correction. Prices will fall (in terms of earnings multiples) by nearly 50%...

 

Do you think a private company that's valued at almost $200 billion can really increase in value by 50% in a single year? Do you think that any private business – which must face constant competitive pressures – is really worth 56 years of operating cash flows or 150 years of earnings? No business in history has ever deserved to be worth this much... and certainly not an Internet retailer. Retailing is an absurdly tough business. It's akin to business suicide.

 

Amazon – the most dominant Internet retailer in the world by a huge margin – produces a return on equity of only 1.5%. And yet investors are paying 20 times book value (today) to own this stock. I doubt those investors are going to do well over the long term...

 

From what I see... the selloff in bonds has already begun. Meanwhile, many stocks are trading at crazy prices already – truly insane levels. Normally, these kinds of sky-high valuations have painful consequences for investors who buy at or near the top. And this time... I fear the consequences could be far, far worse than even I am able to imagine.

 

What were the valuations of good businesses during the previous periods in U.S. history when the Fed was printing similar amounts of money? No, we're not fighting a Civil War. No, we're not fighting a global war against fascism. But our monetary authorities are fighting a desperate war – a war to save the existing sovereign debt markets... a war to bailout all the world's largest governments... a war to save the U.S. dollar... a war to prevent a social collapse... a war to save themselves. It's a war they cannot possibly win.

I hope you realize how crazy stock prices have gotten in some sectors of the market. Last month, 20 different securities made our Black List – that's our tally of stocks with market caps of more than $10 billion that trade for more than 10 times sales. That's a level of "froth" we haven't seen since the stock market's greatest-ever bubble in 2000. There's simply no doubt in my mind that stocks are going to head down this year...

 

I'll repeat what I warned you about last June. The world's economy isn't in a "normal" state. It has been blown about by credit bubbles in almost every major world economy.

 

The prices of many kinds of securities (stocks, bonds, credit-default swaps, commodity futures, etc.) have been warped in a way that makes them very susceptible to massive swings. Margin debt was, until recently, at an all-time high for U.S. stocks, for example. Despite these real risks, stock prices have rarely been higher in the U.S. That's a dangerous combination.

Stocks are being sold to the public without any earnings or any realistic chance at generating net income for years. These companies are trading at astronomical valuations that make it unlikely, if not impossible, for long-term investors to do well... It's not the same as 2000: Investors haven't crowded into dodgy stocks and bonds because of a tech mania. This time, the Federal Reserve is pushing investors. People know inflation is coming – sooner or later – and that bonds yielding less than 5% don't offer them any protection or upside. The result is... like a crowd stampeding at a European soccer match... investors have been forced into a corner without an exit.

 

Yesterday's failed initial public offering (IPO) of video-game maker King Digital marks the first time I can recall a heavily promoted, drastically overpriced stock tanking immediately. Shares of the "Candy Crush Saga" video-game creator fell 16% on its first day of trading. Web-based services Twitter and Groupon have also fallen significantly since their IPOs... but they didn't collapse on the first day.

 

Looking at what I consider the "Big 3" story stocks in the market right now – Tesla, Facebook, and Twitter – you can see that the last month has been rough. My bet is... these names are going to continue falling. And... at some point... after they're down 25% or so... the negative momentum could begin to influence other drastically overpriced stocks.

The signs of a top in the bond market have become impossible to ignore again... much like they were last May. And stocks look dangerous, too... The stocks that are driving the market higher (like electric-car maker Tesla, for example) are low-quality. The quality of bond issuance (as you'll see below) is even worse. Thus, I continue to disagree that stocks are safe and should be bought aggressively now.

 

The investment mania for fixed-income investments, which I thought peaked last May, has returned. Investors spent $3.4 billion in the first quarter of 2014 buying high-yield bonds, outpacing (by a wide margin) the $1.8 billion they invested in high-yield debt in the first quarter of last year. And in some important ways, the mania is now even more dangerous... The quality of this credit has seriously declined with a huge increase in the issuance of "payment in kind" (PIK) bonds. PIK bonds give borrowers the right to repay debt by issuing more debt. These loans are designed with the knowledge that the borrower will at some point have trouble making minimum payments. So far this year, $1.9 billion of PIK bonds have been issued, far more than in the first quarter of last year ($1.2 billion).

 

The trouble isn't only in bonds. The amount of initial public offerings (IPOs) is soaring, while the quality of the firms going public is declining. Earlier today, four start-up firms went public – online food-delivery service GrubHub, energy-software vendor OPower, call-center software maker Five9, and medical-technology company Corium. These offerings raised more than $400 million by selling stock to the public. Only one of these firms is profitable (barely). The combined net income of these companies is negative $52 million.

Great Minds Wanted, Wicked Pens Adored

 

Stansberry & Associates Investment Research is hiring an assistant editor for the S&A Digest and S&A Digest Premium. We're looking for someone with an eye for quality content and a passion for finance.

 

This is an opportunity to communicate daily with one of the largest lists of financial readers in the world. And you'll work closely with the Digest editors – Porter Stansberry and Sean Goldsmith.

 

The ideal candidate is a voracious consumer of financial news and analysis, has a keen mind, lives and breathes the world's markets, and writes great stories. Formal experience is preferred, but may not matter, depending on the candidate.

 

If you've ever wanted to make a living reading, writing, and thinking, please send us:

 

• A writing sample. Tell us about an investment opportunity. We're interested in the fundamentals of your best idea, not something that's based solely on charts. Macro ideas are welcome.

 

• A basic resume. Tell us what you've done before. We admire people who aren't afraid of hard work or odd jobs.

 

• Your income requirements. While we prefer candidates who are willing to work for free, we expect to pay handsomely for qualified employees.

 

No other information is necessary. Send via e-mail – with the subject line "Digest Editor" – to: stansberryresume@gmail.com.