What you need to know about 'junk' bonds... Why the high-yield market is so dangerous today... 'The most important warning I can give'... A special announcement from The Atlas 400...
If you've been reading the Digest closely over the past several weeks, you know Porter's warnings about the high-yield (or "junk") bond market have grown louder...
But if you're new to Stansberry Research, you might also be unsure exactly what junk bonds are... or more important, why they're so dangerous today.
If so, our colleagues Brian Hunt and Ben Morris shared a great review of "junk-bond basics" with DailyWealth Trader subscribers yesterday.
As they explained, junk bonds – like other bonds – are simply interest-bearing loans issued by a company. But what makes them "junk" is the weak financial position of the company.
Just like folks with bad credit histories have to pay higher rates on credit cards, these companies have to pay higher interest rates on their bonds than financially stronger companies.
Brian and Ben used a simple example to explain...
Let's say you have $50,000 you're willing to loan out. You have two options.
Option No. 1 is lending money to the owner of your town's most popular restaurant. It has been owned and operated by the same family for 40 years. The family has an excellent reputation in the community. They want to borrow money to expand their dining room.
Option No. 2 is lending money to a guy who wants to open a brand-new restaurant. He has never managed a restaurant before... or any other kind of business. He's new to the community.
Option No. 1 is clearly the safer choice. You're lending money to proven managers with good reputations. Option No. 2 has more unknowns and more risks. If you were to even consider Option No. 2, you'd demand a much higher interest rate to compensate you for taking on greater risks.
Like in the example above, conservative investors have historically avoided buying junk bonds... and those who buy them have usually demanded much higher interest rates to compensate for taking on greater risks.
But something has changed in the past several years...
Investors have been piling into junk bonds like never before.
As we've discussed – and as investing legend Carl Icahn mentioned in his video last week – the junk-bond market has more than doubled in size since 2007, from about $1 trillion to $2.2 trillion today.
The reason is simple... Thanks to the Federal Reserve's zero-percent interest rates, investors are desperate for yield. And this has created a few big problems...
First, as Brian and Ben explained, it has pushed more and more "conservative" investors into risky junk bonds...
The growth [in the junk-bond market] is due to the low interest rates in savings accounts and other safe investments.
Savers and retirees who need to earn income have been encouraged to buy mutual funds and exchange-traded funds (ETFs) that hold junk bonds and pay higher rates (around 5%-8% today).
But the flood of money into junk bonds over the past few years has pushed prices much higher.
Because bond prices and interest rates trade "inversely" – meaning when prices go up, rates go down – the yields junk bonds offer today are far lower than they've been in the past. And lower yields mean investors aren't being fairly compensated for the much bigger risks they're taking.
Worse, many folks don't even realize they're taking these risks. Here's more from Brian and Ben...
The problem is that the people buying these funds don't understand the risk. It can take days, weeks, or in some cases, years to sell junk bonds. If the economy hits a snag and folks start selling junk bonds, these funds may not be able to find buyers. Prices could plummet in an instant.
The "bottom line" is clear. As Porter explained in the September 29 Digest...
There's going to be a massive crisis because the liquidity profiles of ETFs and mutual funds don't match their underlying assets...
Here's the most important warning I can give: If you own any high-yield bonds through mutual funds or ETFs, sell right now. Do not wait.
We're closing today's Digest with a note from Gray Zurbruegg, director of The Atlas 400.
As you'll see below, he has a special announcement for subscribers who will be joining us in Las Vegas next week for the 2015 Stansberry Conference Series & Alliance Annual Meeting at the Aria Resort & Casino. Here's Gray...
Interested in The Atlas 400? Want to travel the world with interesting people, doing extraordinary things? Would you like to meet and speak with 25 of our current members?
If so, your chance is just around the corner.
But before I tell you how you can meet our current members without spending a dollar, let me tell you a little bit more about The Atlas 400.
A group of us recently returned from a trip to British Columbia. The period after a trip is always a great time for reflection.
My takeaway from British Columbia is that this club is all about people – our members.
It never ceases to amaze me how folks come together on these adventures. New members, old members, friends, and family... everyone gets along. But it's more than that. They form real bonds.
Our latest trip confirmed for me what The Atlas 400 really is: a place that unites individuals who share common characteristics, despite coming from different backgrounds and experiences... and a place where the acceptance, learning, and respect that we've personally experienced can be shared with others.
We want members to understand that real meaning is found in contribution and personal achievement... not in the balance of your bank account or the title on your business card.
This belief transcends subcultures and tribes. It wipes out the differences between us that society tries to reinforce... it fosters relationships with individuals we might never have otherwise met... and it builds a bridge on which we can meet each other halfway.
On our trips, the mathematician speaks with the ad exec. The doctor stands next to the artist, both casting their fly rods into freezing water. The talent agent hikes with the real estate developer.
And we all grow from this exchange.
So if what I've just talked about intrigues you... Please join us for a cocktail reception at Lift Bar in the Aria Resort & Casino, following the Stansberry Conference Series on Tuesday, October 13, 2015.
And please, only come if you're seriously interested in membership.
There's a substantial initiation fee to join ($25,000), and our excursions aren't cheap. But if you're at a point in your life where meaning is paramount and you're in a position to enjoy the fruits of your labor, then we look forward to meeting you.
If you'd like to join us for a cocktail, please e-mail or call me directly at (410) 864-0878. Or if you'd like additional information on The Atlas 400, click here.
New 52-week highs (as of 10/5/15): National Beverage (FIZZ), McDonald's (MCD), and Constellation Brands (STZ).
In the mailbag, one subscriber is confused about his retirement accounts... and another is confused about Stansberry Research. Send your questions, comments, and concerns to feedback@stansberryresearch.com.
"I am really confused, I read your comments about what is predicted to happen in the world, then I speak with companies that hold my investments and they are predicting that the market is pretty strong and expected to go higher and higher. Some articles are saying that the Dow will drop to 6,000 in the next short while or by 2017. I am so confused what to do with investments that are in 401 K's and IRA's.
"I have about 700,000 in 3 different 401K's and one IRA. I am going to be 59 1/2 mid Dec. What do you recommend I do with investments? Did I read that you recommend putting the investments in cash, bonds, and gold? What about silver, or junk silver? What is penny's a on a dollar Bonds?" – Paid-up subscriber Ken S.
Brill comment: Ken, it's important to remember that no one can consistently predict where the market is going next. If anyone says he can, you should reconsider where you're getting your investment advice.
So while Porter has explained why he thinks further declines are likely, he doesn't recommend selling all your stocks and moving entirely to cash.
Unfortunately, we're prohibited from providing individual investment advice, so we can't answer your question directly. But we've been covering many similar concerns recently...
You can find Porter's latest recommendations here. And be sure to read his special, two-part subscriber "Q&A" here and here. And as always, we'll keep readers updated on our latest thoughts in the Digest each day.
"I very much enjoy reading the news and recommendations in the [Digest], however, I get frustrated in the fact that with any of the lucrative recommendations you can never get the companies or tickers without having to pay more money for yet another subscription from one of the advisors. I am of the Baby Boomer era but am not financially set or even close with many financial burdens I am looking to get true assistance in the readings and not spend a fortune and then find you are no further ahead." – Paid-up subscriber Maryann
Brill comment: Maryann, it appears you're confused. As we explained last week, the Digest isn't a paid-subscription service.
Instead, it's a daily letter we provide free of charge to all of our paid subscribers, designed to help busy readers keep up with what really matters in the markets and here at Stansberry Research.
But our free publications are not meant to be a substitute for the paid research you're already receiving...
While we do provide plenty of actionable investment advice in our free publications, you're right... we do often recommend subscriptions to our paid research as well.
This is for a couple reasons... First, we think our paid research is among the best in the world. And second, it's how we stay in business. Unlike other firms, we're completely independent. Selling our own paid research is the only reason we're able to offer our free publications – The Stansberry Digest, DailyWealth, Growth Stock Wire, and The Crux – for free.
On the other hand, your paid research subscriptions are where you'll find the "true assistance" you're looking for. You can always access all of your paid-subscription materials – including all your monthly issues, special reports, current portfolios and recommendations, and more – by logging into our subscriber website here.
Regards,
Justin Brill
Baltimore, Maryland
October 6, 2015
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