Tue, Sep 10, 2013|Sean Goldsmith

The crazy things people do when they're feeling rich...

Why bulging bank accounts can't beat inflation...

There's no doubt the U.S. consumer is flush with cash today. And that's driving stock prices and retail sales higher.

But in today's Digest Premium, Porter shows why you can't simply print your way to prosperity.

To continue reading, scroll down or click here.

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 09/10/2013

Stock	Symbol	Buy Date	Total Return	Publication	Editor
Rite Aid 8.5% Conv. due 5/15/2015	767754BU7	02/06/2009	485.9%	True Income	Stephen Smart
Prestige Brands	PBH	05/13/2009	416.7%	Extreme Value	Ferris
Constellation Brands	STZ	06/02/2011	174.2%	Extreme Value	Ferris
Automatic Data Processing	ADP	10/09/2008	132%	Extreme Value	Ferris
BLADEX	BLX	11/14/2003	126.9%	Extreme Value	Ferris
AB InBev	BUD	05/11/2010	106.1%	Extreme Value	Ferris
Berkshire Hathaway	BRKA	07/08/2005	100.8%	Extreme Value	Ferris
Philip Morris Intl	PM	03/13/2008	96.5%	Extreme Value	Ferris
Altria Group	MO	03/13/2008	85.9%	Extreme Value	Ferris
Intel	INTC	04/10/2009	72.7%	Extreme Value	Ferris

Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.

Top 10 Totals

1	True Income	Stephen Smart
9	Extreme Value	Ferris

In yesterday's Digest Premium, I (Porter) discussed how improving auto sales pointed to a strengthening U.S. economy. It's important to clarify that my market opinion hasn't changed at all...

We're seeing the ongoing ramifications of the Federal Reserve's inflationary policies. And another thought about our improving car sales... The average age of the U.S. car fleet today is 11 years old. That is by far the highest average automobile age we've ever had in the U.S. Lots of people are buying new cars because their cars are wearing out, which is bad.

And they're buying cars that now cost a lot more in terms of nominal numbers. Five years ago, the average price of the Ford F-150 pickup truck was $18,000. Today, it's $24,000. So while your wages haven't changed, cars have gotten more expensive... even though manufacturing productivity has also increased. And that is purely because the value of the dollar is being destroyed by inflation.

So you'll continue to see prices go up in nominal terms and wages go down in real terms. And that's a big problem...

Eventually, the $1 trillion sitting in checking accounts will make its way into the stock market (more so than it already has)... But that won't be enough to fight the effects of inflation.

This inflationary boom will cause the value of stocks to decline in terms of their price ratios, like their price-to-earnings and price-to-book value.

For example, with a 10-year Treasury yield between 4% and 6%, stocks should trade between 10 and 12 times earnings. Right now, stocks are around 16 times earnings. So earnings will have to grow a lot for stocks to maintain their current nominal price.

That's unlikely. We'll probably see stronger economic growth and stronger profits. But inflation and interest rates will be higher. And those higher interest rates will filter back to the companies in the form of higher capital costs.

From an investor's perspective, you'll eventually see money come out of stocks and go back into bonds once yields go between 4% and 6%.

You cannot produce prosperity with a printing press. You can produce commerce. And you can drive people to flee out of the dollar and into commodities and real goods. And if the U.S. car fleet gets really old and everyone's cars start breaking down, you can get people to buy cars by printing money (especially if you offer them cheap loans). But you won't make anybody wealthier in the process.

– Porter Stansberry with Sean Goldsmith

Why bulging bank accounts can't beat inflation...

There's no doubt the U.S. consumer is flush with cash today. And that's driving stock prices and retail sales higher.

But in today's Digest Premium, Porter shows why you can't simply print your way to prosperity.

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

The crazy things people do when they're feeling rich... Gambling stocks ripping... Big numbers in China... Capesize ships... A word of warning from Mr. Marks...

When people are feeling rich, they throw their money away...

How else would casinos prosper?

We're continuing our discussion of the U.S. economy slowly grinding higher... But today, we're focusing on gambling.

In addition to shipping (which we'll update you on in a moment), commodities, and consumer spending – which we covered yesterday – casino stocks are also a good indicator for our economy's health.

With the stock markets still near their all-time highs, people are feeling rich. And in addition to being more comfortable spending money on cars and other goods, people are more comfortable gambling.

As you can see from this chart of the Market Vectors Gaming Fund (BJK) – which contains gaming giants like Las Vegas Sands, Wynn Resorts, and MGM – gambling stocks are at new highs... And they've crushed the overall market...

Porter also argues that increased gambling means people are fearing (or experiencing) inflation... Folks are more likely to gamble if their money is losing purchasing power in savings (as it is today with negative real interest rates).

Porter recommended MGM Resorts in the July 2012 issue of his Investment Advisory as part of his strategy to invest in "trophy assets" – his term for the highest-quality assets in the world. MGM's collection of valuable properties on the Las Vegas Strip makes it a "trophy asset."

At the time, he wrote...

Take MGM Resorts International (NYSE: MGM), for example. The company owns most of the Las Vegas strip, including half of City Center, a $9 billion hotel and casino development. City Center was the largest privately financed development in the history of the United States. MGM owns a host of similar, one-of-a-kind properties in the world's leading gambling cities, including Macau, the only place in China where gambling is legal.

According to the company's accountants, its properties are worth "only" $14 billion. It's important to realize that these balance sheet valuations almost always significantly understate the actual current market value because most of these assets are kept on the books at their acquisition cost.

We believe that MGM's assets may be worth more than the $14 billion accounting "acquisition cost." MGM's assets include nearly 1.1 million square feet of casinos on the Vegas strip, another roughly 450,000 square feet of casinos elsewhere in the U.S., and 50% of the 300,000-plus square feet of MGM Macau. Consider that in 2009 (in the middle of one of the biggest Vegas recessions in history) MGM sold its Treasure Island casino on the strip for nearly $14,000 per square foot. At those prices, MGM's Vegas Strip properties are worth nearly $15 billion all by themselves... you get the Macau property and the other U.S. property for free.

Against its assets, MGM has borrowed $13 billion. For many companies, this would be too much debt... But in MGM's case, the quality of its assets is so high, the company can easily afford the $1 billion a year it spends in interest. It earned almost $3 billion in profit last year on top of its interest expense. And because so much of the capital it uses is borrowed, the return on equity for investors is astounding – more than 50% last year.

Porter closed his MGM position 11 months later in June for a 53% gain... In that issue, titled "A Return to Crisis Conditions," Porter recommended taking some long positions off the table to minimize exposure to an increasingly "toppy" market.

In addition to a strengthening U.S. economy, another large driver for gambling is the improving situation in China. Macau – "The Las Vegas of the Far East," as Las Vegas Sands founder Sheldon Adelson put it – is Asia's gambling hub. It's a peninsula connected to mainland China (and only 37 miles from Hong Kong).

Last year, Macau casinos made $38 billion – more than six times the revenue of Las Vegas.

Like the U.S., Chinese economic numbers are also improving...

Chinese industrial output jumped 10.4% in August from a year earlier, according to the National Bureau of Statistics – that's the fastest pace in 17 months.

Thirty-nine of 41 industries reported growth. Steel production jumped from 10.9% in July to 15.6% in August... Electricity output increased from 8.1% in July to 13.4% in August.

Also, new credit in China has almost doubled since July. And retail sales jumped 13.4%.

China is the world's largest commodities buyer... It consumes more than 60% of the world's iron ore, 42% of the world's copper, 47% of the world's coal, and so on. So when China's on the up, so are shipping rates and commodity prices (as we discussed yesterday).

Of course, China's government is notoriously opaque. So it's worth looking at official data for the facts. However, we're seeing confirmation of this data from other independent sources...

Yesterday, the Baltic Dry Index – which reflects current rates for dry shippers – jumped more than 9%, the biggest one-day gain since June 2009.

And according to industry website Mining.com, rates for Capesize ships give the best insight into China's economy.

Capesize ships haul between 160,000 and 180,000 tonnes. And they're the predominant vessel used for moving iron ore (which makes up more than 20% of the dry bulk trade).

China imported 69 million tonnes of iron ore in August, up 11% from a year ago and close to July's all-time record of 73 million tonnes.

And Capesize rates have surged 67% since the end of August to $25,426 yesterday. But consider this... rates topped at $234,000 in June 2008.

And while the Baltic Dry Index – which currently sits at just less than 1,500 – has doubled from its 2008 lows, it's still a far cry from its May 2008 high of 11,790.

We'll leave you today with some thoughts from Howard Marks, billionaire founder of Oaktree Capital. He's been investing for 40 years. And he's made himself and his investors a fortune focusing on distressed assets... and obsessing over risk.

Yesterday, at a Barclays conference in New York, he gave a presentation titled "Managing Money in Uncertain Times."

On financial news network CNBC, UBS Director of Floor Operations Art Cashin shared a key slide from Marks' presentation:

A Prescription for an Uncertain World

• Make sure your expectations are moderate

• Emphasize corporate investments

• Commit to active decision making – "even doing nothing is doing something"

• Remember that the reasons for caution aren't imaginary – "the improbable disaster" isn't impossible

• Balance the many pros and cons – "it's not supposed to be easy"

The outlook certainly isn't so propitious (and assets aren't so cheap) as to call for investing aggressively. But at the same time, conditions aren't so bad and prices aren't so high that it's time for extreme risk aversion.

• My bottom line: Move forward, but with caution

You can view the entire presentation by downloading the free PDF here.

New 52-week highs (as of 9/9/13): Automatic Data Processing (ADP), ProShares Ultra Biotechnology Fund (BIB), Chesapeake Energy (CHK), Ericsson (ERIC), Expeditors International (EXPD), Fluidigm (FLDM), iShares Biotechnology Fund (IBB), Integrated Device Technology (IDTI), Laredo Petroleum (LPI), Qlik Technologies (QLIK), and Constellation Brands (STZ).

We asked for feedback, and we got some. Please send us more... feedback@stansberryresearch.com.

"You haven't offended me so much as confused the hell out of me. In your predictions on the markets and economy, you guys are bound to be right! You cover all bases, Porter with his doom and gloom and Steve and others predicting at least a mini boom. Don't you think that such an approach could cost you dearly when the bubble breaks, the dam bursts etc. You're bound to pi** off half of your readers. I don't know just how you solve this problem. me. I'm just an unsophisticated old retiree, who has no idea of how to keep my home fires burning." – Paid-up subscriber John T. O'Connor

Goldsmith comment: We know our analysts' opposing viewpoints confuse some folks. We actually tackled that subject in the August 21 Digest.

And we also recorded a special call with Porter, Steve, and a hedge-fund guest to discuss their opposing viewpoints. If you listen to the call, you'll find their opinions aren't all that different... They both know this rally can't last forever. They just disagree on when the downturn will occur.

Regards,

Sean Goldsmith
Miami Beach, Florida
September 10, 2013

Why bulging bank accounts can't beat inflation...