Why I'm predicting a crash...

Stansberry & Associates Hall of Fame
(Top 10 all-time, highest-returning closed positions across all S&A portfolios)

Rare-coin expert shares his favorite gold coin today...

A certain collectible gold coin used to sell for twice the spot price of gold. Today, you can buy one for just 10%-20% more than the price of gold.

In today's Digest Premium, S&A's good friend Van Simmons reveals this opportunity...

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

Why I'm predicting a crash... Record margin debt... Record valuations... Everyone is following the Fed... Ending the year with plenty of cash...

As I (Porter) see it, my job as the head of an independent investment-research company is to always tell you what I would want to know were our roles reversed.

Frequently, though, that presents a big business conflict for me. Often, telling you what I know you ought to hear will upset you or make you angry. Today is one of those times.

I'm certain today's Friday Digest will set a record for number of refunds inspired... You see, nobody likes a bear. And I'm convinced that the market is set to crash in the short term. At the very least, I hope you'll give my reasons a careful read.

Please make sure you understand my argument... Even if you disagree with me and resent me for writing it. Just take the time to think about what I'm saying. There is no teaching. There is only learning. And what you learn from today's Friday Digest could easily save you a fortune.

"Nobody pays you to be bearish." This is the ultimate truth of the advisory business. Nobody likes a bear. Nobody will hire a bear. Nobody will stay in business with a bear for long – especially not during a raging bull market where stocks seem to hit new highs every day.

Thus... it is with a considerable amount of personal and business risk that I announce... I'm now firmly bearish.

In early June, I warned that stocks would suffer when the Federal Reserve stopped printing money. But my timing was off, because the Fed reconsidered and has continued to print.

Now, with the economy heating up, it seems very likely that the printing will have to stop. March is now the consensus time frame. As a result, stocks are going to fall next year. It is time to raise cash, tighten stop losses, and wait for much more attractive valuations. My bet is that a lot of selling happens during the first week of January – as that will push capital-gains taxes into the next tax year. If I'm right about where the market is heading, January should be a terrible month for stocks.

Let me be clear. I'm not equivocating: I believe we are on the verge of a massive rout in stock prices. I see U.S. stocks falling at least 50% in terms of valuation between now and the end of next year. Stocks are going to get crushed.

How do I know? First, all three of the primary, contrarian market indicators we follow in my Investment Advisory (which hits e-mail inboxes today) are showing strongly bullish conditions. Things that drive stock prices higher (i.e. credit, capital flows, and sentiment) are all near record highs. Credit has never been cheaper (record-low risk spreads). Cash into equity mutual funds has never been stronger (money flows). And sentiment has never been more bullish: 19 stocks with a market capitalization of $10 billion-plus are trading for more than 10 times sales. That's the most I've seen since the top of the market in 2000.

You might (rightfully) wonder why I see these hyper-bullish conditions as a negative. You have to remember... our indicators are contrarian. We know when sentiment is at a bullish peak, it has nowhere to go but down. When credit can't get any cheaper, it's bound to become more expensive sooner or later. And when individuals have already spent their cash reserves on stocks, it's unlikely they'll be able to keep buying at the same pace.

In short, as investing legend Warren Buffett once said, to invest successfully, you must be fearful when others are greedy, and greedy when others are fearful. You have to know when conditions have become overheated. You have to know when to stand aside. Without a doubt, this is one of those moments.

It's not only our proprietary indicators that have me worried. U.S. stocks have become very expensive – far more expensive than most people realize. The median price-to-earnings (P/E) ratio on the S&P 500 is now at a record-high level, eclipsing its peak from 2000.

This is important because it speaks to the generally high level of equity prices. Back in 2000, only a handful of large-cap names traded at huge P/E ratios. That's what pushed the average P/E to nearly 50. But the median P/E never got that high... and is a better reflection of the true, broad price of U.S. stocks.

Other historically reliable gauges of value – like the Shiller P/E – are also at record-high levels – above 25. Likewise, the total stock market capitalization compared with U.S. GDP is also at an all-time high. Now, you might quibble with these measures of value.

Shiller, for example, uses a 10-year-average earnings figure, a number that is unusually low because of the big accounting losses seen in 2009. I'd argue that in nearly every 10-year period, we'll see a similar stretch of earnings losses. Whatever issues there are with the index's make-up, it has been a statistically accurate indicator of future returns.

The same goes for the market-cap-to-GDP figure and the median P/E figure. All of these valuation measures and all of my proprietary indicators tell me the same thing: money put into stocks now, at these high levels, is unlikely to produce a positive return.

The problem with this market isn't just the number of very expensive stocks. There's a bona fide dearth of value. Anyone who expects a significant margin of safety when buying a stock isn't going to find much to look at in today's market. Investment-research firm Value Line reports the lowest median three- to five-year appreciation potential among all the stocks it covers. According to Value Line, there's less value in the market today than there was in 2000 or 2007.

So what happens when record numbers of expensive stocks and a record lack of value collides with record enthusiasm for stocks and a Fed hell-bent on moving cash into the stock market?

It's not going to be pretty.

Last week, the percentage of investment advisors reporting themselves "bearish" on the market fell to just 14.3% of the Value Line survey – the lowest level seen in the last 25 years. Looking at the historical record, the only other time when stocks were this expensive and there were so few professional bears was January 1973 – before the market fell 50%. The only years when sentiment was this overwhelmingly bullish and stocks were almost this expensive were: 1972, 1987, and 2007. Those were very bad times to buy stocks.

Two last points. One, margin debt at the New York Stock Exchange is now at the highest level in history – at 2.5% of U.S. GDP. The amount borrowed against stocks to buy stocks is now equal to more than 25% of the entire commercial and industrial loans in the U.S. This is an accident waiting to happen.

Two, the pros know exactly what's coming and when it's going to start falling apart: New equity issuance is running at the fastest pace since the 2000 bubble peak. Insiders don't sell when stocks are cheap.

In my view, the margin debt figure guarantees we'll see a crash, not merely a correction. And don't forget, nearly every large investor today is being driven to buy because of the same macro factor – the Fed.

Many investors continue to buy equity securities merely because they know other investors will be driven out of fixed-income due to the Fed's bond-buying program. I'd estimate the Fed is driving at least 75% of individual investors today.

What will happen when the Fed stops? Markets don't handle massive changes in sentiment well because everyone cannot sell at the same time. The combination of record levels of margin debt and so many investors simply following the Fed is going to cause a historic rush for the exits. Believe me: people will panic. And it won't be a flash crash, either. Make sure you're not waiting until that moment to sell, because there might not be a reasonable bid for your stock.

You may wonder what I'm doing with my own assets. I'm personally raising cash before the end of the year. Outside of one security that I plan to hold forever, I plan to end the year completely out of the stock market. That leaves me with gold bullion, foreign real estate, farmland, a trophy property in Miami, private equity (my publishing company), and lots of cash. If my forecast comes true, I will be one of the lucky few investors waiting at the bottom, just like I was back in 2008/2009. I hope you'll join me.

By the way, I plan on updating everyone on this thesis – hopefully before the crash starts to unfold – at our live event in Miami this coming February... And I'll divulge a brand-new way to protect yourself from the imminent collapse.

From February 28 to March 2, we're hosting our inaugural Stansberry Society event. Stansberry Society is a new business I started this year so our subscribers could get together a few times a year to mingle and share ideas... Plus, we'll invite our top analysts and several world-class guests to present.

It will be like the "TED" talks... The presentations will be high-quality, the ideas we share will be groundbreaking... But the information and the speakers are focused on ideas that you can use to improve your life (unlike TED).

We've just confirmed our keynote speaker for Miami... And I couldn't be more thrilled. I can't believe this person actually agreed to speak. I can't tell you the name, but I guarantee you've heard of this person. This person is one of the most controversial people in the entire world. In my opinion, this is the perfect speaker for our first Stansberry Society gathering.

In addition to Miami, we also have events planned for Dallas, Los Angeles, and Nashville... And if you sign up for Stansberry Society, you'll get VIP access to all four events. We're planning gala dinners and activities around each event that are only available to our VIP members.

If you'd like to learn more about Stansberry Society, or you've been considering signing up, I'd urge you to act quickly... The offer to join the Society closes on Monday. You can learn more here.

New 52-week highs (as of 12/12/13): none.

In today's mailbag, one reader asks how we'll know when the correction has arrived. Send your e-mails to feedback@stansberryresearch.com.

"Wow, what a team you've assembled. As an Alliance member I have the benefit of reading and understanding varying opinions and approaches to building wealth.

"I loved the piece where you and Steve discussed the Market's near term prospects from different sides – great commentary, loads of facts, and a real opportunity to learn ('when the student is ready, a teacher will appear'). I love Doc's sensibility and advice, think Steve is clairvoyant, and buy as many of Dan's recommendations I can. I especially enjoy your candid positions as espoused in print and on the radio – a boldness seriously lacking in our PC world. I don't always agree, but you do make me think... Keep up the great work.

"One question; how will you and your team come together to help us before the great reconciliation begins? It seems you think we're on the cusp, Steve says we have 3 innings to go, and Doc sees a steady grind higher – I'm hopeful for a little more lift, but am getting quite nervous. What signs will your team be watching? How will you capture and share the collective thought so that your readers can act ahead of the herd? I'm mind my stops, but hope the collective wisdom from your team will give us a bit more insight before the countdown to DEFCON 1." – Paid-up subscriber Jeff

Porter comment: Hopefully today's Digest helped to answer that question.

Regards,

Porter Stansberry
Miami Beach, Florida
December 13, 2013

Rare-coin expert shares his favorite gold coin today...

A certain collectible gold coin used to sell for twice the spot price of gold. Today, you can buy one for just 10%-20% more than the price of gold.

In today's Digest Premium, S&A's good friend Van Simmons reveals this opportunity...

To continue reading, scroll down or click here.

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(Top 10 highest-returning open positions across all S&A portfolios)

As of 12/12/2013

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.

Rare-coin expert shares his favorite gold coin today...

As I (Porter) see it, my job as the head of an independent investment-research company is to always tell you what I would want to know were our roles reversed.

Frequently, though, that presents a big business conflict for me. Often, telling you what I know you ought to hear will upset you or make you angry. Today is one of those times.

I'm certain today's Friday Digest will set a record for number of refunds inspired... You see, nobody likes a bear. And I'm convinced that the market is set to crash in the short term. At the very least, I hope you'll give my reasons a careful read.

Please make sure you understand my argument... Even if you disagree with me and resent me for writing it. Just take the time to think about what I'm saying. There is no teaching. There is only learning. And what you learn from today's Friday Digest could easily save you a fortune.

"Nobody pays you to be bearish." This is the ultimate truth of the advisory business. Nobody likes a bear. Nobody will hire a bear. Nobody will stay in business with a bear for long – especially not during a raging bull market where stocks seem to hit new highs every day.

Thus... it is with a considerable amount of personal and business risk that I announce... I'm now firmly bearish.

In early June, I warned that stocks would suffer when the Federal Reserve stopped printing money. But my timing was off, because the Fed reconsidered and has continued to print.

Now, with the economy heating up, it seems very likely that the printing will have to stop. March is now the consensus time frame. As a result, stocks are going to fall next year. It is time to raise cash, tighten stop losses, and wait for much more attractive valuations. My bet is that a lot of selling happens during the first week of January – as that will push capital-gains taxes into the next tax year. If I'm right about where the market is heading, January should be a terrible month for stocks.

Let me be clear. I'm not equivocating: I believe we are on the verge of a massive rout in stock prices. I see U.S. stocks falling at least 50% in terms of valuation between now and the end of next year. Stocks are going to get crushed.

How do I know? First, all three of the primary, contrarian market indicators we follow in my Investment Advisory (which hits e-mail inboxes today) are showing strongly bullish conditions. Things that drive stock prices higher (i.e. credit, capital flows, and sentiment) are all near record highs. Credit has never been cheaper (record-low risk spreads). Cash into equity mutual funds has never been stronger (money flows). And sentiment has never been more bullish: 19 stocks with a market capitalization of $10 billion-plus are trading for more than 10 times sales. That's the most I've seen since the top of the market in 2000.

You might (rightfully) wonder why I see these hyper-bullish conditions as a negative. You have to remember... our indicators are contrarian. We know when sentiment is at a bullish peak, it has nowhere to go but down. When credit can't get any cheaper, it's bound to become more expensive sooner or later. And when individuals have already spent their cash reserves on stocks, it's unlikely they'll be able to keep buying at the same pace.

In short, as investing legend Warren Buffett once said, to invest successfully, you must be fearful when others are greedy, and greedy when others are fearful. You have to know when conditions have become overheated. You have to know when to stand aside. Without a doubt, this is one of those moments.

It's not only our proprietary indicators that have me worried. U.S. stocks have become very expensive – far more expensive than most people realize. The median price-to-earnings (P/E) ratio on the S&P 500 is now at a record-high level, eclipsing its peak from 2000.

This is important because it speaks to the generally high level of equity prices. Back in 2000, only a handful of large-cap names traded at huge P/E ratios. That's what pushed the average P/E to nearly 50. But the median P/E never got that high... and is a better reflection of the true, broad price of U.S. stocks.

Other historically reliable gauges of value – like the Shiller P/E – are also at record-high levels – above 25. Likewise, the total stock market capitalization compared with U.S. GDP is also at an all-time high. Now, you might quibble with these measures of value.

Shiller, for example, uses a 10-year-average earnings figure, a number that is unusually low because of the big accounting losses seen in 2009. I'd argue that in nearly every 10-year period, we'll see a similar stretch of earnings losses. Whatever issues there are with the index's make-up, it has been a statistically accurate indicator of future returns.

The same goes for the market-cap-to-GDP figure and the median P/E figure. All of these valuation measures and all of my proprietary indicators tell me the same thing: money put into stocks now, at these high levels, is unlikely to produce a positive return.

The problem with this market isn't just the number of very expensive stocks. There's a bona fide dearth of value. Anyone who expects a significant margin of safety when buying a stock isn't going to find much to look at in today's market. Investment-research firm Value Line reports the lowest median three- to five-year appreciation potential among all the stocks it covers. According to Value Line, there's less value in the market today than there was in 2000 or 2007.

So what happens when record numbers of expensive stocks and a record lack of value collides with record enthusiasm for stocks and a Fed hell-bent on moving cash into the stock market?

It's not going to be pretty.

Last week, the percentage of investment advisors reporting themselves "bearish" on the market fell to just 14.3% of the Value Line survey – the lowest level seen in the last 25 years. Looking at the historical record, the only other time when stocks were this expensive and there were so few professional bears was January 1973 – before the market fell 50%. The only years when sentiment was this overwhelmingly bullish and stocks were almost this expensive were: 1972, 1987, and 2007. Those were very bad times to buy stocks.

Two last points. One, margin debt at the New York Stock Exchange is now at the highest level in history – at 2.5% of U.S. GDP. The amount borrowed against stocks to buy stocks is now equal to more than 25% of the entire commercial and industrial loans in the U.S. This is an accident waiting to happen.

Two, the pros know exactly what's coming and when it's going to start falling apart: New equity issuance is running at the fastest pace since the 2000 bubble peak. Insiders don't sell when stocks are cheap.

In my view, the margin debt figure guarantees we'll see a crash, not merely a correction. And don't forget, nearly every large investor today is being driven to buy because of the same macro factor – the Fed.

Many investors continue to buy equity securities merely because they know other investors will be driven out of fixed-income due to the Fed's bond-buying program. I'd estimate the Fed is driving at least 75% of individual investors today.

What will happen when the Fed stops? Markets don't handle massive changes in sentiment well because everyone cannot sell at the same time. The combination of record levels of margin debt and so many investors simply following the Fed is going to cause a historic rush for the exits. Believe me: people will panic. And it won't be a flash crash, either. Make sure you're not waiting until that moment to sell, because there might not be a reasonable bid for your stock.

You may wonder what I'm doing with my own assets. I'm personally raising cash before the end of the year. Outside of one security that I plan to hold forever, I plan to end the year completely out of the stock market. That leaves me with gold bullion, foreign real estate, farmland, a trophy property in Miami, private equity (my publishing company), and lots of cash. If my forecast comes true, I will be one of the lucky few investors waiting at the bottom, just like I was back in 2008/2009. I hope you'll join me.

By the way, I plan on updating everyone on this thesis – hopefully before the crash starts to unfold – at our live event in Miami this coming February... And I'll divulge a brand-new way to protect yourself from the imminent collapse.

From February 28 to March 2, we're hosting our inaugural Stansberry Society event. Stansberry Society is a new business I started this year so our subscribers could get together a few times a year to mingle and share ideas... Plus, we'll invite our top analysts and several world-class guests to present.

It will be like the "TED" talks... The presentations will be high-quality, the ideas we share will be groundbreaking... But the information and the speakers are focused on ideas that you can use to improve your life (unlike TED).

We've just confirmed our keynote speaker for Miami... And I couldn't be more thrilled. I can't believe this person actually agreed to speak. I can't tell you the name, but I guarantee you've heard of this person. This person is one of the most controversial people in the entire world. In my opinion, this is the perfect speaker for our first Stansberry Society gathering.

In addition to Miami, we also have events planned for Dallas, Los Angeles, and Nashville... And if you sign up for Stansberry Society, you'll get VIP access to all four events. We're planning gala dinners and activities around each event that are only available to our VIP members.

If you'd like to learn more about Stansberry Society, or you've been considering signing up, I'd urge you to act quickly... The offer to join the Society closes on Monday. You can learn more here.

New 52-week highs (as of 12/12/13): none.

In today's mailbag, one reader asks how we'll know when the correction has arrived. Send your e-mails to feedback@stansberryresearch.com.

"Wow, what a team you've assembled. As an Alliance member I have the benefit of reading and understanding varying opinions and approaches to building wealth.

"I loved the piece where you and Steve discussed the Market's near term prospects from different sides – great commentary, loads of facts, and a real opportunity to learn ('when the student is ready, a teacher will appear'). I love Doc's sensibility and advice, think Steve is clairvoyant, and buy as many of Dan's recommendations I can. I especially enjoy your candid positions as espoused in print and on the radio – a boldness seriously lacking in our PC world. I don't always agree, but you do make me think... Keep up the great work.

"One question; how will you and your team come together to help us before the great reconciliation begins? It seems you think we're on the cusp, Steve says we have 3 innings to go, and Doc sees a steady grind higher – I'm hopeful for a little more lift, but am getting quite nervous. What signs will your team be watching? How will you capture and share the collective thought so that your readers can act ahead of the herd? I'm mind my stops, but hope the collective wisdom from your team will give us a bit more insight before the countdown to DEFCON 1." – Paid-up subscriber Jeff

Porter comment: Hopefully today's Digest helped to answer that question.

Regards,

Porter Stansberry
Miami Beach, Florida
December 13, 2013

Editor's note: Today's Digest Premium comes from rare-coin expert Van Simmons. Van has been in the collectibles business for decades. He co-founded the Professional Coin Grading Service, which has become the benchmark grading service for collectible coins. Today, he shares his favorite gold coin on the market...

When I (Van) was a kid in the late 1960s and '70s, $20 gold pieces traded at around double the spot price of gold. When gold was $40 an ounce, these coins were $70 to $80.

When gold hit $840 in 1980, the premium dropped to around 20%-30% over spot. The timing was similar to today in many ways... People were selling silver tea sets and flatware sets. Just about anything gold or silver was being sold for its metal content. Gold coins flooded the market and the collector premium fell. (I bought a beautiful silver flatware set that my family still brings out on special events, for the melt value of the silver.)

When the price of gold came back down from $840 to the $275 range over the next two decades, the premium on gold coins quickly went back up.

Throughout the 1990s, the price of gold was in the $265-$285 range. But the $20 pieces in circulated condition were 75%-125% over the spot price of gold.

Today, you can buy "brilliant uncirculated" coins for a 10%-20% premium over the price of gold.

When gold peaked around $1,900 an ounce in August 2011, people again rushed to sell their gold... So the premium for these collectible coins fell again. Collectors' supply outweighs demand.

But at some point in the future, I expect we'll once again see premiums for $20 gold pieces between 75% and 125%.

A final, interesting point... In 1933, when President Franklin Delano Roosevelt made it illegal to own gold, he classified U.S. gold coins as collector coins, not bullion coins. Most U.S. citizens weren't aware of the law and just turned them in. But today, many legal minds would say we have a case law in place regarding U.S. gold coins that were struck prior to the law in 1933.

If gold were outlawed today, these U.S. gold coins should still be recognized as collector coins, not gold bullion coins.

In Jim Rickards' book Currency Wars, he says he's concerned that gold will be outlawed... But more than that, he says our government could place a windfall profits tax on gold-bullion products.

Picture President Obama or the head of the Federal Reserve getting on TV and stating, "The world's greedy gold traders and currency traders have threatened to ruin the value of the U.S. dollar. Therefore, we are going to impose a windfall profits tax, like we did on the large oil companies, of 95% on gold bullion products."

At some point, we should see the premium on the pre-1933 coins return to where it has usually been for 60 years... And we can eliminate the possibility of confiscation or a windfall profits tax on our gold.

– Van Simmons

Editor's note: As we explained in yesterday's Digest, we can't recommend working with Van enough. We receive no incentive for recommending his services... But he has always taken good care of S&A's subscribers. You can call Van at 800-759-7575 or e-mail him at info@davidhall.com.