'The largest legal exchange of wealth in U.S. history'... Three simple ways to profit from the next bear market... Why Steve Sjuggerud is preparing for lower stock prices... What Porter and Steve agree on today...
Regular Digest readers know Porter believes the recent correction is likely the start of a much larger decline. As he noted in last Friday's Digest...
I believe we're approaching a period of rising credit defaults, higher lending costs, and falling corporate profits. To follow along at home, just watch a big exchange-traded fund of corporate bonds, like the iShares iBoxx High Yield Corporate Bond Fund (HYG).
As I've been warning you since May 2013, interest rates on corporate borrowing reached completely unsustainable lows. They must reverse. And that's going to cause a lot of temporary financial pain. Maybe even some panic.
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But as he explained, it's important to understand what's really behind these problems... and to keep the "big picture" in perspective...
No, I don't believe this is the end of the world. It's just a normal cyclical feature of our credit markets. However, this particular period of rising credit risks will be a lot worse than normal because the Federal Reserve cut short the last "credit-cleansing" back in 2009 by essentially guaranteeing a trillion dollars in bad debts, which allowed them to be "rolled over" instead of going through default. These actions, and the following manipulation of interest rates to essentially zero, have seen more low-quality borrowers taking out bigger loans, against weaker and weaker terms.
This kind of binge lending, fueled by low interest rates, always ends badly. I'm sure it will end poorly again and soon. Marty Fridson, the world's leading expert on the credit cycle in corporate bonds, predicts something around $1.6 trillion in defaults over the next four years. That sounds bad. And it will be, for a lot of people.
But it doesn't have to be bad for you. This will be the largest legal exchange of wealth in U.S. history. Investors who have borrowed too much are going to be wiped out. But for investors with cash, this will be the best buying opportunity of the decade.
Porter says there are three basic strategies you can use to profit during the coming bear market. But you need to start preparing now...
The first of these is simply to short stocks. That allows you to make a profit as share prices decline. You want to look for companies that have borrowed way too much money or whose business models depend on access to low-cost financing. We're recommending two such short-sell trades in my newsletter this month.
If shorting a stock is unfamiliar to you and you're afraid to try, then start small: Just short a single share. You'll discover that it's no different than simply buying a stock. But whatever you do, don't ignore this advice. Learn to short. Make sure you have an arrangement with your broker so that you're allowed to do so. This might be the key to avoid taking big losses on your other investments.
As we've discussed many times, shorting the right stocks can be a great way to protect – or "hedge" – your portfolio against losses as the broad markets fall.
Again, if you're new to the idea of short-selling, you can find a great introduction in the Stansberry Research Education Center here. And you can read a more "advanced" explanation in the August 22, 2014 Digest.
But if you want to do even better, Porter says there are two other strategies you must consider. The first is what he calls the "Alpha Anomaly"...
The short explanation is simple enough: When investors get scared, they will pay you to agree to buy shares from them. It's like selling other investors insurance. And as the market dives, selling this kind of insurance can be very lucrative.
Back in 2008/2009, I averaged 50% gains on each of these trades, which typically only take six months or so to close, implying 100%-plus annualized gains. I'll explain more about this strategy over time. It's complex. But it's worth it, I promise.
And the second involves one of the safest, most lucrative opportunities in the market, but one most investors completely overlook...
Finally... there's an easy and totally safe way to make a killing during a credit correction. All you've got to do is some basic math to figure out which companies can actually afford to repay their bonds. It's not hard. At all. Why other investors don't do this, I can't understand.
What happens is, when bonds start falling, they can be downgraded by rating agencies. When that happens, banks, insurance companies, pension funds, etc. frequently are forced to sell because they're not allowed to own bonds below a certain rating. Prices for bonds – even fairly high-quality bonds – can plummet. Now, buying bonds isn't as easy as buying stocks. You have to use the telephone to call your broker's bond desk. It might take two or three minutes to fill a trade, instead of instantly like with stocks. For some people, these challenges are just too much. But if you're willing to endure a phone call, you will probably be able to buy bonds for half of what they'll pay out when they mature.
That means you can collect interest rates of more than 10% while you wait to double your money at maturity, which is typically two or three years away. These are fantastic investments. I promise, if you do a couple of these trades with us you'll never buy stocks again. For more details, go back and read our 2011 Report Card (published in January 2012) and consider the track record of our True Income publication coming out of the last credit cycle. We will be relaunching a distressed debt publication soon.
But Porter isn't the only one who thinks investors could see some big opportunities to profit from the downside in coming months...
Longtime readers know our colleague Steve Sjuggerud has been one of the most outspoken bulls over the past several years. Steve predicted the "Bernanke Asset Bubble" would drive stocks and other assets much higher (and for much longer) than most folks believed. And he has been exactly right.
But following the recent correction, Steve has become more cautious. And while he isn't turning bearish today, he is preparing to help readers profit if stocks do head lower from here.
In the September issue of True Wealth Systems, published last Thursday, Steve and his research analyst Brett Eversole explained their latest project...
Over the last few months, we tried to figure out how to make money betting against the stock market. In our TWS office, we've coined this idea the "Bear Market Project."
As you know, we've spent more than $1 million developing the absolute best money-making investment systems. We've found the best ways to make money in the U.S. and around the globe.
Our track record over the last four years speaks for itself. We're closing a 324% trade in health care and a 101% trade in U.S. stocks this month. But until recently, we hadn't put a major effort into making money betting against the stock market. We have now.
While the results of this research are proprietary, there are a couple important takeaways we can share today...
First, Steve and Brett are putting the finishing touches on a new system designed to profit from the downside in stocks. History suggests double-digit gains are likely... without taking big risks, and without having to short stocks. We'll be sure to update Digest readers when the system is ready.
In the meantime, Steve says he isn't ready to bet against the market just yet. While he's being extremely cautious with new investments, he believes it's too soon to be sure the bull market is over...
Our shorter-term indicators are telling us we just hit a negative sentiment extreme. We hit the moment of capitulation. History says we should do well from here. For example...
Going back to 1950, any time stocks fell by more than 1% for four days in a row, stocks soared over the next 12 months. The average gain was 26.7%. There was not a single losing 12-month period after four straight days of 1% or more drops... Yes, investors are scared... And yes, the market has corrected over the past month... But this isn't enough to convince me a massive crash has just begun.
I could be wrong, of course. Shorting the market could be the right decision today. But I'm afraid that putting on a short position right now would lead to a "whipsaw" over the next month and a small loss.
So, what should you make of Porter and Steve's differing views on the market? Despite their differences, their recommendations are surprisingly similar today...
Like us, both Porter and Steve think this is a time for caution. Stay long your "winners"... but keep a close eye on your trailing stops. Limit new purchases to high-quality stocks (and high-conviction speculations, if appropriate).
Take some time to learn about short-selling now, so you'll be prepared if stocks head lower. If you're especially conservative, consider taking Porter's advice to simply sell short a stock or two today for practice.
And rest assured, we'll be here with plenty of ideas to help you profit and protect your capital regardless of where the market is headed.
New 52-week highs (as of 9/8/15): National Beverage (FIZZ) and Inogen (INGN).
In the mailbag, readers write in about Porter's response yesterday to subscriber Joe... and Joe writes back in with a follow-up note. Send your thoughts to feedback@stansberryresearch.com.
"Hi Porter, as a new Stansberry Alliance member, I was very excited to read your response to Joe's email. Thank you for sharing your continued vision of the future with all of us. I look forward to a long and profitable relationship with you and your team. Thank you very much." – Paid-up subscriber Harris Freed
"Porter, I've been following you since Pirate Investor days (long time). I'm sure your subscriber Joe in his letter of concern to you is sincere. However, my problem is a different one – I can't keep up. Your assertion that the volume and quality of the Stansberry Research product have improved is a very humble understatement! They have exploded. I work in investment sales and you are correct to say that the quality of your publications, analysts, and copywriters (understanding the recommendations is critical) is not only on a par with what's out there... it far surpasses what's out there. It's not even close.
"That's why I became an Alliance member. Your people are among the most gifted in their fields and I drink up their insights daily. Every business that's scaling up the way Stansberry Research is will falter at times. Most falter badly or fail altogether. You have not – if anything, the bigger you guys get it seems, the better you become. Very rare. This subscriber (and Joe, too I'm sure) is very grateful for your maniacal commitment to quality and to your customers." – Paid-up subscriber LAF
"Dear Porter, thank you for the thoughtful reply to my email. That you circulated the email to your staff and took an entire episode of the Digest to explain your position means the topic is important to you. Please know I am trying to protect my investment as I'm sure you would also. I appreciate the explanations you provided and look forward to many more years of excellent investment advice. I've learned a ton since joining and surely look forward to reading your publications every day. Again, thank you." – Paid-up subscriber Joe Hanna
Regards,
Justin Brill
Baltimore, Maryland
September 9, 2015
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