The Feast Is Coming

Steve Sjuggerud's shocking China call... All winners, no losers... Why sell a high-yielding bond? A big fan in the mailbag: 'You people are pathetic'... The feast is coming...

Most of our subscribers don't know much (or anything) about our new Asian equity-research business...

Nor do they realize how this business is quietly powering some of our very best investment ideas.

In today's Friday Digest, I (Porter) wanted to share a few details about our first major international expansion... and show you the dividends it's already paying for our subscribers.

Let me start here...

Most people don't know that I've been friends with Steve Sjuggerud since I was 12 years old. Growing up in Winter Park, Florida, Steve was the most talented kid I knew.

He was a great tennis player, a state-champion rower, and a fantastic soccer player, too. He's also a world-class guitar player and one of the world's most accomplished "watermen" (he surfs, windsurfs, kitesurfs, and competes in stand-up paddle surfing)...

More than 20 years ago, in July 1996, Steve called me up right after I graduated from college. He said, "Hey Porter, I've got to go to China for two weeks. Do you think you could come down here and handle things at the office for me while I'm away? Who knows, you might even decide you want to help me write a financial newsletter..."

Well, Steve was right. I loved the work he was doing and soon landed a job doing financial research on emerging markets. I wonder if any of my first subscribers to Latin American Index still read my work...

That initial job led to more opportunities with bigger titles and eventually, to starting my own financial-research company in 1999. But my career started with Steve going to China to see what was happening in Asia firsthand.

(On another Asia trip a few years later, Steve got pinned down in a hotel during a coup attempt in Jakarta, Indonesia. For some reason, the hotel was blaring Barry Manilow songs through speakers all over the building. Steve told me he had never been through a more bizarre situation... hiding from gunfire, listening to Barry Manilow. Asia can be pretty weird.)

My point is, I don't know anyone who has done more to understand the massive economic revolution taking place in Asia. Steve has been working hard on these ideas for his entire career. I'm proud of what he has accomplished for our subscribers over the years by consistently being ahead of the crowd with the best ideas across all of Asia's big markets.

Why does this matter?

Over the next 25 years or so, Asia's leading cities will become by far the wealthiest cities in the world. As a result, investors have huge opportunities in these markets – everything from safe investments in real estate and infrastructure to far riskier opportunities in media and technology.

I'd estimate that less than 5% of our subscribers have ever purchased a foreign stock of any kind. And I'm sure after reading today's Digest, I might only convince a tiny fraction of today's readers to even consider making an investment in China, Singapore, or Hong Kong.

That's fine with me, of course. You shouldn't invest in things you don't understand. But if you're interested in learning (there's no such thing as teaching), I hope you'll take the time to read a bit more about the work Steve has been doing.

As I mentioned, Steve has been traveling to China (and other major Asian markets) regularly since the mid-1990s. He has developed excellent high-level contacts in these markets and has cultivated those relationships for decades.

These relationships led directly to the first significant international expansion of our business. About a year ago, we partnered with a legendary Asian equity investor Peter Churchouse to a launch a Singapore- and Hong Kong-based investment-research firm, modestly named Stansberry Churchouse Research. Peter has been investing across Asia since the early 1980s. For many years, he was the head of Morgan Stanley's Asian Research Department. Later, he founded the first Asian property hedge fund.

How did Hong Kong become so wealthy?

In the 50 years following its Japanese occupation in the 1940s, Hong Kong went from being one of the poorest cities in the world to one of the richest. It became far wealthier than its former colonial master, Great Britain. Singapore followed the same economic trajectory. Growth in both cities was powered by the English system of common law and property rights, low taxes, immigration, and trade.

Since the early 1990s, this formula has been copied across Asia, including in China. The resulting economic growth has transformed the world's economy. China, for example, now dominates the market for virtually every "hard" commodity in the world, from copper to zinc. But these changes are only beginning...

Today, only two of the world's most economically important cities are in Asia...

Measuring by gross domestic product per city, only Seoul and Shanghai appear on the list. But six Asian cities appear in the top 20, and 11 appear in the top 30.

In every case, the Asian markets are growing faster – usually twice as fast – as their bigger Western rivals.

Within another 20 years, half of the top 10 cities in the world will be Asian cities. Beijing, Hong Kong, Guangzhou, Tianjin, and Singapore will all move up into the top 10. And dozens of other Asian cities, such as Shenzhen, Suzhou, Taipei, and Jakarta will jump past their current Western rivals.

It shouldn't surprise anyone that investors have more opportunity in, say, Mumbai, India, than they do in the city ranked just ahead of it today (Milan).

What should you do about the growth of these markets?

Start by signing up for Stansberry Churchouse's free daily e-letter, Asia Wealth Investment Daily. Peter is the single best local guide to these markets. Let Peter and the team we've helped him build introduce you to these markets and the best investment opportunities there. It won't cost you anything.

When you're ready to invest, sign up for Steve's True Wealth China Opportunities newsletter. About a year ago, Steve made a contrarian and bold call – that China was a "buy" again, after several years of stagnant equity performance and a big chorus of investment bigwig naysayers predicting an economic collapse.

Well, a year after Steve's shocking "buy China now" call, 19 of the 21 positions in his China portfolio are up. And seven out of the original 19 stocks he recommended last summer have risen more than 20%, with even bigger gains of as much as 59% in the Chinese Internet firms he recommended.

This isn't "cherry-picking." Steve's True Wealth China Opportunities portfolio performance has been nothing short of incredible. Once again, Steve has found a way to deliver outstanding investment performance, while taking extremely little risk. Almost all of these investments have done well. For longtime subscribers, this shouldn't be a surprise. Again and again, Steve finds low-risk ways to make extremely big returns for his readers.

I realize most of you will never understand how much wealth is being created in Asia...

You won't believe that people in Beijing, Hong Kong, Singapore, and Shanghai already have lifestyles that are far, far wealthier and more sophisticated than anything you'll find in any Western city.

In the last 10 years, we've hosted two of our annual Alliance meetings in Asia (in Hong Kong and Singapore). And only a few weeks ago, Steve took a handful of our subscribers to investor meetings in Beijing and Hong Kong.

We'll continue to show you the incredible opportunities for investors in Asia. But... will you take advantage of any of these ideas?

Go see these cities for yourself – either at one of our meetings, or simply on your own. Get to know the top 25 Asian companies. Follow their annual reports. And take advantage of the high-quality research that we're providing investors via both True Wealth China Opportunities and the entire team of analysts we're assembling in Asia at Stansberry Churchouse Research. Don't let another 20 years go by without making at least a few high-quality, long-term investments in Asia.

New 52-week highs (as of 6/22/17): AbbVie (ABBV), Boeing (BA), Becton Dickinson (BDX), Digital Realty Trust (DLR), Fidelity Select Medical Equipment and Systems Fund (FSMEX), Johnson & Johnson (JNJ), McDonald's (MCD), ALPS Medical Breakthroughs Fund (SBIO), Tencent (TCEHY), U.S. Concrete (USCR), and Weight Watchers (WTW).

In the mailbag... another "fan." Alas, we can't please everyone. Not even with an almost perfect track record that contains more than a half dozen 20%-plus winners in less than a year. How have we let you down, dear subscribers? Let us know at feedback@stansberryresearch.com.

"You people are pathetic. You would think that Steve was the only one expecting China shares to be added to the MSCI index. Many investment firms were predicting this so it wasn't any great revelation or a BOLD move. What crap you print! BTW – the small amount they added to the index initially barely moved the index return, not like the gross exaggerations that you people print. Cut out all the BS. It makes Stansberry look very bush league and very unprofessional. But I forgot, you are just in the business of selling subscriptions NOT being professional investors." – Paid-up subscriber Mike Leslie

Porter comment: Among the several opportunities that Steve brought to the attention of investors over the past year was the idea that eventually the world's most important stock-index provider (MSCI) would have to begin including local Chinese stocks (known as "A-shares") in its emerging market indexes.

This change will result in hundreds of billions of dollars being invested into these markets. The likelihood of these changes taking place in the near term, among other factors, led Steve to make his excellent bullish call on China last year.

What Mike doesn't understand is the initial amount of the changes MSCI has proposed will continue to grow. I also don't think Mike has any understanding of how influential Steve's publication is among the "professional investors" Mike seems to admire.

No, nothing is wrong with being a "professional investor." Steve ran a mutual fund and a hedge fund before joining me at Stansberry Research in 2001. Today, however, Steve's letters are some of the most widely read research publications in the world, with more than 40,000 investment professionals among our subscriber base. And Mike, it was Steve who began writing about the changes that were necessary to MSCI's database more than three years ago.

"In [one of] the latest Stansberry's Credit Opportunities [issues] we have another recommendation to sell a bond from the portfolio, even though there is no concern about the company's credit worthiness. You reassured us that PDL BioPharma could easily pay off the bond, but then recommended selling it when it trades at par. We are going to get par when the bond closes out, so why are we selling it now? It's clear there are very few opportunities for the Credit Opportunities strategy right now. Like many of your subscribers I'm trying to build up a percentage of my portfolio in bonds using the service." – Paid-up subscriber Ted Haugen

Porter comment: I believe the strategy we use at Stansberry's Credit Opportunities is the absolute best way for most people to invest their capital. Most individual investors lack the emotional fortitude to successfully deal with the inevitable volatility of common stocks.

Likewise, I believe the best chance you have to guarantee success as an investor is to increase the current yield from your investments. (It's awfully hard to lose money when your investments are paying you more than 10% a year.) That's why I constantly tell people: if you understood how to buy high-yield bonds, you'd never buy a stock again.

Proving this strategy really works has been a tremendous joy for my incredible team and me. Senior analysts Bryan Beach and Mike DiBiase deserve special recognition. They've built an analytical approach that starts with more than 40,000 individual corporate-debt securities. Then, by comparing their prices, yields, ratings, and fundamentals, our team produces a few dozen opportunities for detailed study every month. We assign our own ratings to these securities and then look for anomalies where current ratings (and prices) are most likely wrong.

This approach has seen us recommend 17 different corporate bonds since the fall of 2015. We have recommended selling nine winning positions. And yes, we've had one small loser, too. (We booked a tiny 2.6% loss on Atwood Oceanics – the only blemish on our track record so far.) Our closed positions have an average total return of 25%, with average holding periods that are less than a year. So on our sold positions, our returns tally to 33% on an annualized basis.

There's no question in my mind that these bonds have performed far better than any of our stock portfolios during the same period. That's because when you buy a bond, the company has a legal obligation to return your principal and pay you interest during your holding period. By buying these bonds when other investors won't, we're able to purchase them at discounts (sometimes big discounts) to par, which is what generates the usually high returns.

And just so you'll know that I'm not fudging any of these numbers, which are truly extraordinary, we also currently hold six open positions (plus one we recommended earlier this week). They are all showing a profit, with an average gain of 8% (19% annualized).

To answer your question about why we would want to sell a money-good bond (one that's very unlikely to default) when it's still paying a good yield, remember that most of the outstanding returns we're generating using this strategy come from the discount when we buy. When you buy a $1,000 bond for only $800, you're going to get a 25% return the moment you sell at par. Sure, the coupon payments are great, but if you can get the big return by selling at par today, you should take it.

For example, let's look at the bond you asked about, the PDL BioPharma bond.

When we first recommended it, we calculated that our "yield to maturity" (that's how much money we expected to make on the investment, per year) was 17%. But as you know, its discount to par closed early. That enabled us to make most of our profits faster than we expected. By selling this bond nine months early, we were able to increase our annualized yield to 24%. By continuing to hold the bond, we were only going to earn a cash yield of 5%.

Our goal is to maximize our return on invested capital by trying to minimize the time we spend in these investments, provided we can sell at par (or better). Over time, this strategy will greatly increase the return on our portfolio.

But keep in mind, we don't provide any individual advice. You are, of course, free to hang on to these bonds until maturity if you're happy receiving the income, instead of trying to maximize your total returns.

Finally... I know a lot of subscribers are frustrated that we're not able to manufacture more and more of these opportunities. We can't create these opportunities, of course... We can only spot them when they occur.

At the moment, we're at a truly historic peak – a bubble – in the corporate-bond market. Never before has more capital been lent to America's corporations... and never for less interest... or against less collateral. This boom will eventually end. And it will be very painful for most investors. But that inevitable correction won't hurt anyone who has continued to take the big discounts the market was offering and was smart enough to sell when the bonds returned to par.

One more thing... selling at par also allows you to have plenty of cash for new opportunities. Don't worry. One day soon, hundreds of bonds will trade at huge discounts. These opportunities tend to come in waves... So this strategy tends to be "feast or famine."

Be patient. The feast is coming.

Regards,

Porter Stansberry
Baltimore, Maryland
June 23, 2017