Stansberry goes global...

Stansberry goes global... How to find the best conditions in the world for investors... A brilliant secret from George Soros... Day No. 7 in the 'Nine Days of Porter' series... Don't complain about the ads...

Very simple question: Do you think the current macroeconomic conditions in the United States are optimal for equity investors?

I don't. Optimal conditions for equity investors last existed in the U.S. in the late 1970s and early 1980s. At one point during that period, real interest rates reached as high as 10% a year in the U.S. and Treasury bonds were offering investors nominal yields as high as 15%. With fixed income offering such large returns, equity valuations collapsed. At one point in the early 1980s, you could have bought oil major Exxon for less than five times earnings and gotten a dividend yield of nearly 8%.

We have almost the opposite conditions today. Real interest rates in the U.S., Europe, and Japan are currently negative. So much excess capital is in these bond markets that the sovereign borrowers no longer must offer any effective rate of return. Central banks have flooded these markets with capital.

These conditions are terrible for equity investors, as valuations can become untethered from earnings. Stocks become expensive. And make no mistake... U.S. stocks are expensive right now. So part of my advice has been to wait until the general conditions are more favorable to long-term investors. That's what I mean when I write about "allocating to value" and only making large commitments when other investors are panicking.

On the other hand... why wait? You can find developed equity markets all around the world in countries where property and contract laws are enforced and Western accounting is common. Isn't it possible that optimal conditions for equity investors exist somewhere?

Everyone has the ability today to invest in markets all over the world. Country-specific exchange-traded funds (ETFs) offer cheap and easy access to most developed markets in the world. And you can invest in some high-quality foreign companies that list their shares on the New York Stock Exchange. Also, no law prohibits you from buying shares on foreign exchanges... and obviously, sometimes foreign markets are far more attractive than ours.

Since 2000, the number of Americans holding a valid passport has doubled. Today, more than 110 million Americans hold a passport – roughly 30% of the population. Sadly, that doesn't mean most Americans have any real appreciation for foreign countries or cultures. It only means that post-9/11 Americans were forced to carry a passport to cross the borders with Canada and Mexico. I'm sure that far less than 30% of U.S. investors consider buying foreign stocks or investing in foreign stock market ETFs.

That doesn't make any sense to me. Some subscribers will think it's risky to invest outside of the U.S., where our laws and courts might not be able to protect investors. To me, that kind of thinking is laughable. It pretends that there's something particularly noble or efficacious about our legal system. If you believe that, you've never been involved with it.

Meanwhile, the facts are almost the opposite of what most Americans believe. It's far riskier to hold all of your investments in one country and one currency. That's especially true when conditions are as poor as they are today for equity investors in America.

We recently launched two new, foreign-oriented newsletters. The S&A Global Contrarian is a "blood-in-the-streets" look at the world's most completely "blown-out" equity markets. Our Global Contrarian editor, Kim Iskyan, is the most experienced and well-traveled financial writer in the world today. He helped build stock exchanges across the former Soviet Union in the 1990s. Since then, he has covered emerging markets for hedge funds and investment banks. He has spent his adult life traveling the world, building relationships with bankers, brokers, and investors.

Who else could offer you insights into Iran's emerging stock market? Who else would travel to Ukraine in the midst of a war to find high-quality, dirt-cheap investments? Who else jumped on a plane to Thailand as soon as martial law was declared? Kim did. I'm extremely proud of his work in Global Contrarian. There's nothing like it available, at any price, anywhere else. I believe it is a must-read for any serious investor.

However, today, I want to explain how our other international publication works. Stansberry International starts with the same approach as our Stansberry's Investment Advisory. We look for high-quality, capital-efficient businesses and "Trophy Asset" stocks... but we're only looking for these kinds of investments in markets where conditions are optimal for equity investors. I don't believe this kind of investing is risky at all. I believe it's far safer than buying stocks in an overpriced U.S. market.

But look... I'm not trying to sell you another newsletter. I've promised in these nine Digests (we're on No. 7) to only give you the most valuable information I can... the strategies and ideas that I would want you to give me if our roles were reversed. Whether you subscribe to Stansberry International or not, I want you to understand why I hired Brett Aitken – a well-traveled, New Zealand-born business analyst living in Barcelona – to help me cover the most attractive global markets. And I want you to know the secret to our approach.

First: Like it or not, America is shrinking in terms of the global economy. When I was born (1972), the U.S. made up about 70% of the world's economy. By the time my sons have children, the U.S. economy will only represent about 20% of global gross domestic product (GDP). Many countries around the world are growing faster than the U.S. Many countries around the world have much larger potential markets. These places will offer excellent investment opportunities, ones that will often be better and safer than buying U.S. stocks. Giving up these opportunities automatically by never considering them is like trying to win a wrestling match with one arm. You might win. But even if you do, it would have been a hell of a lot easier with both arms.

Brett and I maintain a simple spreadsheet that covers all of the investable markets in the world – places with well-established capital markets and companies that are listed on the New York Stock Exchange. The core of our strategy relies on only two variables: real interest rates and equity valuations. We're looking for markets that reward capital (high real interest rates) and offer low equity prices. These are the markets that offer ideal conditions – just like the U.S. did in the early 1980s.

Let me show you what our database shows us right now and tell you what it means. In the chart below, we've circled the area that contains the most attractive markets. These are markets that offer both high real interest rates and low valuations.

To better compare markets around the world with many different types of companies, we use the broadest measure of valuation – a price-to-sales ratio – to plot the chart. But we consider three measures of valuation in total – price to sales, price to book value, and price to earnings. There are, of course, problems with all of these measures of valuation when looking at specific companies. But using them to compare "meta-data" across markets is fine.

Ideally, we'd like to see real interest rates above 10% and extremely low valuations – price to sales under 0.5x, price to book around 1x, and price to earnings below 10x. We saw those conditions a year ago in Greece.

You might recall that last summer, I suggested buying the Global X FTSE Greece 20 Fund (GREK), which holds a basket of Greek stocks, based on conversations I had with my friend, Erez Kalir. Erez, who runs the Ironbark Investments hedge fund, had visited the country and was extremely bullish on its prospects. To hedge the trade, I also suggested "pairing" a long position on Greece by shorting the iShares MSCI France Fund (EWQ), which, naturally, holds a collection of French equities.

If you made the trade, you ended up making more than 50% in a year on Greece, while you would have lost about 25% on the France short. Just keep in mind... we didn't intend to make money shorting France. We simply figured that Greece would do better than France. And it did. The net gain was still great – better than 25% in a year. And that was from a fully hedged trade – you had no net exposure to stocks or Europe.

When we see perfect conditions for equity investors, buying country-specific ETFs is fine. But we believe that in the long term, we can do even better by buying the best companies in these markets. So for us, Step 1 is to figure out where equity investors have their best opportunity.

For example, in Greece, we recommended buying Mytilineos Holdings. The company is basically the Berkshire Hathaway of Greece. It's a collection of lots of high-quality businesses. The head of Fairfax Holdings, Prem Watsa – the outstanding value investor I spoke about yesterday – has a large position in the company.

When we recommended the stock, it was trading at a 20% discount to book value, a price-to-sales ratio below 0.5x, and an incredibly cheap price-to-cash-flow ratio under 4x. This is as close to buying Exxon in 1981 as any security anywhere in the world right now.

Currently in Stansberry International, we've recommended about a dozen different companies, mostly in Greece and Spain. Going forward, Argentina seems most attractive.

I know you will probably never follow us into these markets. It's hard to grasp the idea that conditions that seem terrible for investors (high interest rates, collapsing stock prices) actually set the stage for a new bull market. The crisis Greece experienced from 2010-2012 created absurdly cheap stock prices. Today, the market is desperate for capital and offers investors outstanding returns.

Does buying into countries recovering from crises come with some risks? Yes, of course. But it also offers a high likelihood of outstanding profits. Meanwhile, investing in the U.S. – where stock prices are high, interest rates are low, and a debt crisis still looms – might "feel" safe. But it isn't safe at all.

It's far better to invest in markets where low prices and high interest rates more than compensate investors for risk, than to invest in markets where conditions are terrible for capital and there's zero compensation for risk.

(Editor's note: Currently, Stansberry International is only available to lifetime subscribers... if you'd like to learn more about a lifetime subscription to Stansberry's Investment Advisory, which gives you access to Porter and Brett's international research, click here.)

By the way, this strategy isn't new. Lots of successful investors – like Sir John Templeton in the 1960s, Quantum Fund's George Soros and Jim Rogers in the 1970s and 1980s, and Tiger Fund's Julian Robertson in the 1990s – made a lot of money over the years following this global strategy.

I know it works. And I know it would work for you, if you were simply willing to try it. If you're too afraid to consider it right now, I understand. Here's what I suggest. Try just buying a tiny stake. Like literally one share. See how it goes. See if it's really as scary as you think. If you'll just try it, I'm sure you'll come to agree with me: It's a lot easier to win a wrestling match with both arms.

Oh... one more thing. I've gotten to know Jim Rogers a little bit over the years. He was very kind to me early in my career. And he has been a guest on my podcast a few times. One of the real secrets he shared to Soros' success in foreign markets shocked me...

Jim says that when they'd go into foreign markets after a crisis, they'd always buy the highest-quality companies – the "banks and brewers" – and they'd always buy a similar amount of the very worst stocks, stuff that was almost out of business. Buying the best and the worst was their secret. It worked because a few of those worst businesses would recover, resulting in astronomical profits, which would more than cover the losses on the ones that didn't make it. It's a cool idea... something I would have never thought to try without the tip from Jim. Obviously, the key is small position sizes and diversification across several risky opportunities.

One last note... Regular Digest readers know that one of the people in this business who I respect and admire the most is Sprott Global Resource Investments founder Rick Rule. I've known Rick for more than a decade and consider him an incredible mentor and a close friend.

That's why I've invited him to speak at almost every Stansberry & Associates event we've held over the past few years. Rick is one of the world's most sought-after financial minds. That makes him difficult to pin down. But this summer, he has decided to extend a special invitation to us...

Rick has invited us to attend a private event he's hosting next month in Vancouver. It's the premier resource-investing conference of 2014... and he's saving a handful of seats for S&A subscribers.

I've already decided to send two of our analysts – S&A Resource Report editor Matt Badiali and Extreme Value editor Dan Ferris – to this event. If you're interested in natural resource investing – including oil and gas, gold and silver, and rare earth metals – I highly suggest you join them.

Matt and Dan will present at the conference. They will share their favorite ways to profit from resource stocks right now... some of which are far too speculative to publish in their monthly newsletters.

Several of the biggest "home runs" in S&A's 15-year history have come from ideas we learned about at this event, including 597% gains on ATAC Resources... 335% gains on Silver Wheaton... and 322% gains on Northern Dynasty – all three of which appear at the bottom of every Digest in the "Stansberry & Associates Hall of Fame." If history repeats itself, I suspect Matt and Dan will unearth a handful of stocks that double and triple... or better.

If you're interested in joining our analysts at this prestigious conference – which is being held July 22-25 – you'll need to act quickly... Rick has arranged a special early bird discount for S&A subscribers, but the offer expires soon. For the full details on this event, click here.

New 52-week highs (as of 6/24/2014): Intel (INTC), Coca-Cola (KO), ONE Gas (OGS), Integrys Energy Group (TEG), Teekay LNG Partners (TGP), Invesco High Income Trust (VLT), and Vanguard Natural Resources (VNR).

Now look... I promised you nine days in a row of outstanding, "my very best ideas" content. So far, I don't believe I've let you down. Sure, I know most of you won't ever invest in overseas markets. Fine. There's no such thing as teaching, there's only learning. If you won't try it, what can I do? But whether you liked today's Digest or not, I don't think you would argue that these ideas aren't valuable. But what about your end of the deal?

More than 98% of our subscribers have yet to send me a single piece of feedback. Tomorrow is day No. 8 in my series. This is your last chance to send me useful feedback that I can reply to before my run is over. At the very, very least, please tell me which of the Digests I've written in this series was most valuable to you and why. Thanks in advance: feedback@stansberryresearch.com.

"I'm fairly new to S&A, so I may have missed it previously, but I'm not sure I understand your statement: There's no such thing as teaching. There's only learning. I saw this in yesterday's S&A Digest and I've seen it before in other articles. The reason I ask is many times S&A contributors, perhaps even you, refer to what we're going to be teaching you in this article. My take on this is that you are simply saying you must DO whatever it is being discussed (taught) to actually learn it. There is no substitute for hands-on work whether it's research or actual investing. That it?" – Paid-up subscriber Barry G.

Porter comment: I don't believe in the idea of teaching. That's not quite the same as saying I don't believe teachers are important. I believe you can't teach anyone anything. Feel free to disagree with me. Many teachers are probably offended by my position because they're taking me literally. But I'm talking about something deeper...

And listen... I have no idea if my idea is true or accurate. And I don't care. I simply think it's more effective to believe that no one can teach you anything.

I believe there is only learning. This philosophy puts all of the responsibility on the student. And I believe that's the correct way to think about it. A teacher cannot make you think, cannot make you read accurately, cannot provide you with experience or practice, and therefore cannot give you mastery. These things are the student's responsibility.

That's why I like to remind you, gentle subscribers, that I can't teach you anything. I can provide the information... but it's up to you if you want to actually learn.

"I rarely comment on Stansberry... but I must say that so far your 9 day stint has been the best from any publication that I've ever seen. And I've had a lot of experience at 91 years of age. WW II vet, retired twice, and going completely broke once, primarily from a lack of knowledge about 'risk'. SPLENDID WORK." – Paid-up subscriber Fred Wiedemann

Porter comment: What a wonderful note. Thank you.

"Thank you for what S&A provides. With the information in your newsletters, I have learned a lot about finances and investing, specifically how to decipher annual reports... I spent 20 years (now retired) in the military listening to investing advice from those around me who I thought were financially sound (only because I could not discern between blather and real information) and like most individual investors, I lost a lot of money (at least to me it was a lot of money). Today, and for the few years, I am turning it around, informing my kids on what I have learned from your company.

"But based on my learning, I have to ask: Why do you use a universal life insurance policy as 'an alternative form of savings' (from your response in the June 24, 2014 Digest to questions about 401k)? My understanding of whole life (aka universal, return-of-premium, whole, cash value) policies is the life insurance company only has to pay the face value of the policy and does not distribute the cash value account. I believe this is true because if you borrow money from a cash value account (as non-educated people may do) and then die before the loan is paid, the face value will decrease by the balance of the loan before it is distributed. And yes, there are some whole life policies that CAN have a clause written into it where the cash value is returned, but most are not." – Paid-up subscriber Alan S.

Porter comment: I'm far from an expert on whole life insurance policies. Even if I were an expert, I have no idea what the terms of your policy might be... nor am I licensed to advise you on it. So my comments below pertain only to my situation, not yours.

Life insurance is a strangely sensitive topic for people. I know lots of very smart people – like Retirement Millionaire editor Dr. David "Doc" Eifrig, for example – are critical of life insurance. All I can tell you is that the policy I bought makes sense for me, given my family's needs and the overall structure of my personal financial life.

My objective with the life insurance I bought (from Pacific Life) wasn't to maximize my financial returns. Instead, I appreciated the asset protection. It's nearly impossible to have life insurance taken away from you, and it can be even safer if you create a trust as a beneficiary. I also liked the tax-free compounding the policy offered, as I plan to live a long time (hopefully).

I like the idea of having redundant layers of financial assets and streams of income to make sure that, almost no matter what, I can continue to provide for my family. If one type of savings fails or if one of my businesses fails, I want to make sure that I have other options. The more redundant the layers, the better.

On my boat (www.twosunscharters.com), we have a 12-person life raft that launches automatically if the boat becomes submerged. We have a "ditch kit" with everything you'd need to survive in the water for days, including a water maker, fishing line, hooks, flairs, a first-aid kit, food, an EPIRB, a hand-held satellite phone, etc. It sits on a shelf right next to the door leading out of the bridge. We update the ditch kit every six months and change all of the batteries. We have an expensive fire-prevention system in our engine-room. We have two fully independent, German-built diesel engines (2,000 horsepower each). Both are capable of moving the boat at cruising speeds. We have multiple fuel tanks. We have two independent generators. We have a back-up electrical system. We have multiple VHF radios and EPIRBs at both helm stations. We have dozens of life jackets, first-aid kits, and a defibrillator.

And best of all, we have a complete bad-ass of a captain (Steve Hubbard), who once personally fought off three bat-wielding murderers on St. Maartin and served for years in the U.S. Coast Guard. Nothing feels better to me than knowing that Steve is my friend, that he loves my wife and my kids, and that he would put his life on the line to save me or them. Steve is one of the greatest human beings I've ever met in my life. If you've ever met him, you know what I mean.

But outside of a few Band-Aids, we've never used any of our safety equipment. We've never had an engine go down. We've never had a generator fail. Once, the microwave broke. We don't have a backup for that, so we heated our burritos on the engine-valve covers. Worked fine.

The point is, having all of these things in place and ready to go makes my boat safe enough for my family (or yours). Without all of these things, we wouldn't be as safe as possible. I don't expect something to go wrong. We maintain the boat to the highest possible standard and my captain is the best in the world. But I don't ever want to be in a position where I can't protect my family or my friends.

I feel the same way about my financial security. I don't plan on dying this year. I'm only 41. But if it's my time, I've got multiple sources of income and multiple layers of assets to protect my wife and my two sons.

Life insurance is part of that mosaic for me. It's part of my backup plan. It's far from the only life raft I've got – but it serves a specific purpose in my plan. It has several unique properties. For example, the value of the policy could move into my kids' hands without those assets becoming part of my taxable estate.

I've seen a lot of people worry themselves to death about financial security. I won't do that. When I'm on the boat, I'm only thinking about fishing and how beautiful the islands are... Likewise, with my life and my career, I realize the only real security I've got are my own skills, work ethic, and hundreds of friends, all around the world, whom I know would be willing to give me another opportunity if I somehow botch the career I've made so far.

"What you have given us (your readers) has real financial value, is quite easy to read and I for one am most appreciative. I tire of the endless progression of 'deals' that are sent daily to my inbox and welcome these, your truly important missives." – Paid-up subscriber David B.

Porter comment: I always chuckle a bit when folks who like our newsletters complain about our ads, their length, the breathless tone, etc. I remember when I was a child I complained to my father about advertisements on television. "Porter, if it wasn't for the advertisers, there wouldn't be any television."

If it weren't for our advertising – our relentless and endless ads – these newsletters wouldn't be published. And if we didn't use the kind of advertising that works, we'd be out of business in a year.

Instead of sitting here writing a reply to you this morning, I'd be one of the hundreds of great money managers you've never heard of. Those guys certainly don't advertise. You wouldn't have been able to profit from any of the strategies, ideas, or recommendations we've published over the last 15 years.

Fannie Mae and Freddie Mac going broke? That would have made my clients hundreds of millions. GM going bankrupt? Same. The prediction that a flood of oil and gas would see the U.S. become a major energy exporter and make shale drillers billions? I could have kept all of that stuff to myself and done just fine.

So if you really don't care for our business model, no problem. I'm always happy to part as friends. I'm pretty sure I can find something productive to do with my time.

Oh... one more thing... how do you think we got your business in the first place?

"Beyond this particular set of essays, thank you for sharing what you would like to know if our positions were reversed. I appreciate that you don't back down from saying/writing what you think without much sugar-coating. You have challenged many of my views over time.

I read your work, completely disagree, and get so irritated that I have to put it down and walk away for a while. Then I find myself thinking about what you wrote and looking at the world a little differently. I have surprised my family more than once with this. And you have opened up entirely new topics and lines of communications for us. There was a time I would never have even mentioned your stuff, much less forwarded The Digest to my sister. So again, thank you. Keep up the good work!" – Paid-up subscriber Monica K.

Regards,

Porter Stansberry
Baltimore, Maryland
June 25, 2014

Taking a peek behind the curtain of Porter's 'Black List'...

Every month, Porter and his research team update the Stansberry's Investment Advisory "Black List."

In today's Digest Premium, he explains the meaning behind the Black List... and shares how many companies qualify today...

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

Taking a peek behind the curtain of Porter's 'Black List'...

Editor's note: Yesterday, Porter discussed where to find value in the market. In today's Digest Premium, he explains the details behind the Stansberry's Investment Advisory "Black List" – a bearish monitor he updates every month...

We have an entire index we call our "Black List."

The list is made up of stocks with a market cap in excess of $10 billion and a price-to-sales ratio greater than 10. In our experience, there are few companies whose equity is worth more than 10 times sales when they have achieved a $10 billion market cap. It's difficult for large businesses to trade at such high valuations. Eventually, revenue growth has to slow down and the company has to become valued based on its earnings... and not on its hopes and dreams of soaring to the moon.

As you can see in the following chart, this list had gone vertical since 2012. Share prices have gone straight up. We run this chart in my Investment Advisory every month. Lately, it has begun to correct. That correction started in March and has accelerated since then...

In our experience, you will find fewer than five companies on the "Black List" during market bottoms, and more than 10 companies on the list around market tops. This month, 23 companies fit the criteria. As I explained in my newsletter, this is "a high and concerning number."

On the list, we look for companies that we believe are engaged in fraudulent accounting or sales practices. Then we look for companies on the list that we believe are in ultimately obsolete businesses. Believe it or not, that's not an oxymoron.

Take social-media website Twitter, for example. It's hard for me to imagine how Twitter actually has a business model. Users post free messages to the Internet. I don't know how you're ever going to monetize that. I think you could make the case that Twitter's business model is already obsolete, even though people don't realize it yet.

You will also find companies on the Black List that have balance sheets that are either upside down or seriously impaired. Take electric car-maker Tesla for example. Tesla already has debts that are equal to 78% of its assets. So it is essentially a fully mortgaged business... Which means raising money going forward is going to have to come out of the equity side of the business. And that, ultimately, likely means a lot of dilution.

– Porter Stansberry

Taking a peek behind the curtain of Porter's 'Black List'...

Every month, Porter and his research team update the Stansberry's Investment Advisory "Black List."

In today's Digest Premium, he explains the meaning behind the Black List... and shares how many companies qualify today...

To continue reading, scroll down or click here.