Thu, Jan 1, 2015|Sean Goldsmith

What the consensus hates today...

Editor's note: "Training week" continues at Stansberry Research. Today, we'll share why the recent selloff in commodities – paired with end-of-year trading activity – has created a sweet spot for contrarian investors. And we'll explain why Extreme Value editor Dan Ferris is super-bullish today.

But first, we're discussing one of the biggest questions heading into 2015...

What will happen to interest rates next year?

The consensus is that rates are going to rise... but the consensus is usually wrong.

The U.S. economy continues to display strength. U.S. gross domestic product (GDP) expanded at a 5% annual rate in the third quarter, the most since 2003. Unemployment fell to a six-year low. And the dollar is at its strongest point since 2010.

As a result, for the first time in almost a decade, the Federal Reserve is set to raise interest rates in 2015. Based on projections of a higher Federal Reserve funds rate, Wall Street is forecasting 10-year Treasury yields to increase to 3% by the end of next year, according to Bloomberg. (That's up from today's 2.2% levels.) The two-year note is expected to double to 1.5%... and 30-year notes are expected to jump to 3.7% by this time next year.

As Amber Lee Mason wrote in the December 1 issue of DailyWealth Trader...

When you buy Treasurys, you're also making a bet that interest rates won't rise (as interest rates rise, bond prices fall). Interest rates have been falling for about 30 years now. At some point, the argument goes, they have nowhere to go but UP. This is a popular idea with investment managers.

However, popular investment ideas are usually losers. Regular DailyWealth Trader readers know that when "the crowd" is betting one way, it's a good sign you should take the other side of that bet. And the evidence pointed toward a crowded trade against U.S. Treasurys...

While everyone is expecting U.S. Treasurys to fall and correspondingly for yields to rise, there are a lot of reasons to consider the opposite side of the bet.

There's a chance that U.S. Treasury prices could head much higher in 2015 (pushing yields much lower).

Skeptical? Take a look at the yields on 10-year notes around the world...

Country	10-Year Treasury Yield
U.S.	2.2%
Italy	1.9%
Canada	1.8%
Great Britain	1.8%
Spain	1.6%
France	0.8%
Netherlands	0.7%
Germany	0.5%
Japan	0.3%
Switzerland	0.3%

Is the United States so much riskier than Spain or France that you would rather give your money to those governments at a lower yield? As evidenced by the strength of the dollar this year, it's clear that the U.S. is still the safest place to put your money.

The breakdown in high-yield bonds have also caused a rush into Treasurys, as we discussed in the December 12 Digest.

The U.S. dollar is still the world's reserve currency. Ultimately, the dollar is the safe-haven where capital flees to when things get rough. The global economy is facing some challenges that could trigger far more money to flood into U.S. Treasurys.

Japan is experiencing a recession and deflation and continues to devalue the yen. Growth in China is slowing to its lowest levels since the early 1990s.

Europe is in a similar recessionary environment with low growth and borderline deflation. Its countries continue to argue about stimulus versus austerity. Meanwhile, left-wing populist parties have enough support to potentially cause Greece and Spain to default, sending Europe into a sovereign debt crisis.

Venezuela announced it's officially in a recession. Global Contrarian editor Kim Iskyan is predicting that Venezuela will default on its debt. And as we discussed yesterday, Russia is spiraling deeper into crisis, with its weakening currency and energy-dependent economy.

In short, there are numerous reasons in 2015 for investors around the world to seek the safety of the U.S. dollar and U.S. Treasurys... which makes it less likely for the Federal Reserve to increase interest rates.

As Amber pointed out in the same issue of DailyWealth Trader...

A stronger dollar also makes it less likely that the Fed will raise interest rates and stop the Treasury rally. Typically, the Fed raises rates to slow down inflation – an erosion of the dollar's value. As long as the dollar is becoming more valuable, inflation isn't a worry.

Back in April, Amber recommended a way to profit as interest rates fell with the double-long ProShares Ultra 20-Plus Year Treasury Bond (UBT). Her DailyWealth Trader subscribers are up 34% on the recommendation.

One last item of note before we discuss the next installment of "training week"... The latest in the ongoing saga of Brazilian state-owned oil giant Petrobras.

As we discussed in the December 11 Digest, Petrobras is in the middle of a civil lawsuit as part of a giant corruption investigation.

And if massive legal troubles weren't enough, Petrobras is also one of the highest-cost oil producers in the world. Its massive reserves are in super-deep water. And $53-a-barrel oil is killing profit margins.

This week, Petrobras made headlines again... again for something negative.

Now Petrobras expects its $24 billion pension fund to be implicated in the corruption scandal. As a result, payments to contractors involved in the corruption scheme were frozen.

Further, those contractors will not be allowed to participate in Petrobras' $221 billion five-year investment plan, one of the oil industry's largest.

Funds allocated to that plan will be reduced as Petrobras needs to preserve cash in the midst of the scandal and lower oil prices.

On top of this, some investors are trying to push Petrobras into a technical default on $54 billion of U.S.-governed Petrobras bonds. The terms of those bonds say Petrobras has to file third-quarter financial statements within 90 days of the close of that quarter (which would be December 29)... But that date has passed and Petrobras still hasn't filed its financials due to the corruption scandal.

Shares of Petrobras are still down around 90% from their 2008 peak.

Now to Dan Ferris' incredible opportunity...

The strategy behind Dan's Extreme Value advisory is self-explanatory: He looks for the best values in the stock market, be it a World Dominator like semiconductor giant Intel or a tiny Canadian resource firm.

We're sharing an excerpt from a recent edition of our weekend Masters Series, where Dan explained why commodities are such a great deal today. It was one of the most popular pieces we ran this year...

Investors should embrace The Principle of Ever-Changing Cycles.

That's the title of Chapter 5 of Robert L. Bacon's classic book on betting the ponies, Secrets of Professional Turf Betting.

On page 31, Bacon writes...

The principle of ever-changing cycles turns bull markets to bear markets and vice versa. In both cases, the public embraces a trend, and the embrace becomes the kiss of death. The trend reverses and leaves the majority of investors holding losses or missing out on new bull-market gains.

Technology stocks were a winning idea in the late 1990s... until the tech-heavy Nasdaq peaked in March 2000 and changed suddenly and drastically, falling 78.5% over the next two and a half years. Housing and structured finance were winning ideas until they suddenly and drastically caused the biggest financial crisis since the Great Depression.

The principle of ever-changing cycles works at the bottom, too. Everyone hated stocks in March 2009, the perfect moment to buy. Stocks suddenly and drastically soared that year and for the next four years.

Natural resource stocks were adored in spring 2011. Investors got used to winning back some of the money they lost in the financial crisis. They read stories about the Federal Reserve printing record amounts of money to stimulate the economy. They feared inflation.

Gold hit a new all-time high of $1,900 an ounce. Gold and resource stocks were rising and the trend attracted investors who'd lost money in the 2008-2009 crash. The public had gotten wise to a winning idea. Then a quick and drastic change drove the U.S. dollar up and commodity prices and mining stocks down, down, down.

The sequence of results in metals prices has been extremely bad for the past three years, driving down precious-metal and base-metal prices. Here's what things look like today...

Metal	Return (2011-2014)
Gold	-37%
Silver	-67%
Platinum	-36%
Copper	-35%
Lead	-33%
Zinc	-14%
Iron Ore	-65%

A sudden and drastic reversal of the bearish trend at this point would surprise everyone... except those of us who know how the principle of ever-changing cycles forces quick and drastic changes right when the expectation of more of the same becomes a popular idea.

And of course, the share prices of the companies that produce these metals have been hit even harder. The Market Vectors Gold Miners Fund (GDX) is down about 73% in the last three and a half years. The Market Vectors Junior Gold Miners Fund (GDXJ) is even worse, down 85%. The numbers boggle the mind.

The losses suffered by so many investors in natural resources over the past three years won't go on forever. Once the public "gets wise" and expects an existing trend to continue – either bullish or bearish – a quick and drastic change usually isn't too far away.

I expect that to happen in natural resource stocks – a quick and drastic change... a reversal of the bear market.

I'm not a wizard. I can't predict exactly when a quick and drastic change will turn the resource bear market into a bull. But I suspect it'll happen sometime in 2015.

When it does, you could make a ton of money in the upswing.

Regards,

Sean Goldsmith
January 1, 2015