Wednesday, March 31, 2010


Like the 10-year note we mentioned yesterday, our friend Dr. Copper just made a dramatic "pop" higher.

Copper is a vital ingredient in cars, power lines, refrigerators, plumbing, and electronics, so its price is an excellent indicator of global economic health. The metal enjoyed a huge rally in 2009 as governments around the world "reflated" their struggling economies with cheap credit. Over a month ago, we ran a chart of copper and noted the metal's huge run higher looked to be ending. This week, however, copper staged an enormous jump to reach a new 52-week high.

Like the soaring shares of restaurants and Home Depot, the big move higher in copper shows the government's monstrous "E-Z-Credit" program is working right now. Demand for just about everything is increasing... and taking copper, restaurant profits, and home-improvement shares higher.

We'll say it again: Sure, the U.S. economy has terrible problems right now. Government debt and government debt are the two biggest. But until the charts of things like copper start to break down, we can only stand back in amazement and say, "Well done Bernanke, Geithner, and Obama, you've made spenders and speculators out of us all."


It didn't take long for our interest rate warning last week to get a little more serious...

Last Wednesday, we ran a chart displaying the most important interest rate in the world... the yield offered by U.S. 10-year Treasury bonds. This is the world's "must watch" interest rate... the price Uncle Sam must pay creditors in order to borrow money. We said if the yield on this bond "breaks out" to a new yearly high into the 4% area, it's a sign the "higher rates ahead" crowd is right.

On that same day, the 10-year's interest rate exploded higher to register its largest weekly increase since December. Former Fed chief Alan "E-Z-Credit" Greenspan even took to the airwaves to warn folks that the move is a "canary in the coal mine" for higher borrowing costs ahead.

This move also causes us to remember author Robert Heinlein's classic quote, "there ain't no such thing as a free lunch." Bottom line: The U.S. government can only spend money like a lunatic for so long before creditors say, "Enough... we need more interest to compensate us for the risk of loaning money to a crazed spender." As you can see from today's chart, the recent "pop" in rates is getting us closer to a new high.

Tuesday, March 30, 2010

The NEW Greatest Trade Ever

Last weekend, my friend Porter Stansberry gave one of the most powerful speeches of his career (we've been working together for about 14 years, so I've seen a lot of them).

We were at the open-air Blue Iguana restaurant on Ambergris Caye in Belize. And Porter told the small crowd the story of the NEW Greatest Trade Ever...

After that speech, the attendees who weren't compelled to act on his idea are either incredibly foolish ("that's too crazy") or incredibly lazy ("ah, we've got time before all that comes to pass").

You might know the story of the old "Greatest Trade Ever." In short, in 2007, hedge-fund manager John Paulson made $15 BILLION for investors in his fund by betting against the housing market. (If you don't know the story, pick up the book The Greatest Trade Ever by Gregory Zuckerman.)

Betting against housing seems obvious in hindsight... But when Paulson put the trade on, he was essentially alone – everyone thought the government would somehow manage to keep the charade going.

Porter's speech in Belize was as compelling as Paulson's ideas were two years ago. Like Paulson's, Porter's trade is obvious, but everyone expects the government will smooth it over. Like Paulson's, Porter's trade may reach a point where the government simply can't fix it – and get there sooner than anyone expects.

Porter's idea is really big... He believes the entire paper money system is about to fail – very soon.

"If aliens landed tomorrow, they wouldn't understand our money system at all," he explained. "The aliens would ask, 'People really save these pieces of paper backed by nothing, issued without restraint, by a government that certainly can't pay its debts? That makes no sense!'"

As Porter sees it, "The United States is the only government in the world that can actually afford to underwrite the world's banking system. That's not because we have any real savings, it's only because we control the world's reserve currency. It's a paper standard, which means we can always print more of it."

Of course, that has been the case for years now. It's worked in the past. But Porter laid out the coming collapse of that system... and what's bringing it to a head right now:

"The annual funding costs of our national debt are now approaching $4 trillion per year between deficits and rolling over short-term debts. There is no entity large enough... not even China... that can come close to lending us the $4 trillion we need in the next 12 months. Add every possible source up, and you're still short by $2 trillion."

It was a dire speech. The most compelling part was the obvious inevitability of it all. The only question is the timing – when does the U.S. dollar house of cards fall?

Betting on the collapse of the paper money system will be the Greatest Trade Ever... some day. Porter predicts it will be way sooner than anyone thinks.

What does Porter recommend to play the new Greatest Trade Ever? One thing: Gold.

No point getting craftier than that. Governments can print money, but they can't print gold. Porter prefers to own it... Have it in your possession, not in a paper form in an account somewhere.

While the "end of paper money" is an outlandish prediction, Porter has a history of "outlandish" predictions that have come true...

Years ago, he predicted the end of General Motors. Many readers got angry and thought it was impossible. GM was an American icon. But Porter got it right, and GM shareholders were wiped out.

In November 2007, his single best idea at our annual investor conference was the demise of Fannie Mae and Freddie Mac. Back then, they were two of the largest companies in America. It was a shocking prediction. Within a year, they were bust.

Today, Porter's big prediction is his most outlandish ever. We're not talking about iconic American companies. We're talking the end of the world money system. But Porter's track record is excellent. And the outcome is inevitable, as he showed.

Porter is buying gold. And so is the guy who made the Greatest Trade Ever, John Paulson. Paulson recently took a multi-BILLION dollar position in gold and launched a gold fund.

In 2007, Paulson saw an inevitable crash in housing and made the Greatest Trade Ever.

In 2010, Paulson and Stansberry are betting against the dollar – they're buying gold. How about you? 

How China could cause a gold shortage

Chinese demand for gold is set to double in tonnage terms within just ten years according to the latest World Gold Council (WGC) analysis. Chinese gold consumption was worth more than US$14billion in 2009, which is equivalent to 11% of global gold demand. Launched today, Gold in the Year of the Tiger provides an outlook for all aspects of gold's supply and demand fundamentals in China.

Marcus Grubb, Managing Director, Investment at WGC, said:

"The excitement generated by the Chinese economic growth story is not new. However, clarifying the impact of China's GDP growth trajectory on the outlook for the Chinese gold market has been elusive - until today.

"Now one of the world's largest economies, China has already rapidly become a prominent gold market.

Monday, March 29, 2010

The Easiest Way to Open a Foreign Bank Account

The U.S. government has built up the largest debt in the history of the world, and there's no possible way it'll ever be able to pay it back. Worse, this debt is now growing faster than ever before... and no one in Washington seems to care.

It's impossible to predict exactly when, but eventually the markets are going to question the solvency of the government... and there's going to be a dollar crisis.

With these insane policies in ascendance in Washington right now, it's never been more important for Americans to get familiar with foreign investments, bank accounts, and tax havens. That's true whether you've got $5 million in the bank or $50,000. This is where Joel comes in...

Joel is one of America's top international asset lawyers. He helps large companies set up entities in foreign countries. He helps billionaires protect their wealth from the taxman. He advises hedge funds on their foreign investments. And he's an expert on immigration and expatriation..

In short, Joel Nagel's expertise is in such high demand, he sits on the board of directors for 15 companies, advising them on their foreign investments and asset protection strategies.

This week, my colleague Brian Hunt asked Joel Nagel the first thing the average American can do to protect his or her assets from a dollar crisis...

"Open a bank account based outside the United States," said Nagel.

Nagel says this is the easiest way to protect your money from a devaluation of the dollar or another failure in the banking system. Most importantly, if capital starts fleeing the U.S. and Washington decides to implement capital controls – inevitable in my opinion – you'll have a nest egg outside the country.

So how do you open a foreign bank account?

The obvious step is to go to a foreign country and find a bank branch. Almost any bank will open an account for you, regardless of where you come from. When I was in China, for example, I opened up a bank account at the Industrial and Commercial Bank of China using just my passport. The whole process took about 20 minutes.

For Americans, I recommend Canada. It's close, it's convenient, and the banks are strong. The Royal Bank of Canada will open a non-resident account for you with two pieces of ID.

If you're not willing to take a vacation to Canada, you'll have to jump through a few more hoops. Bureaucracy is the problem. To hinder money laundering and terrorism, governments encourage banks to only accept new account applications in person. They're called the "Know Your Customer" rules.

Here's one idea...

The Royal Bank of Canada operates a bank in America called RBC Bank. TD Canada Trust also operates banks in America.

Contact customer service at a Canada-based institution and ask them to send you an application for a new account. Then contact your closest branch in America and ask them to help you process the application without you having to fly to Canada.

It won't be easy. The American branch will tell you they are a totally different operating entity from the Canadian bank. You'll probably have to spend a few hours on the phone... But a lady from RBC's customer service assured me it's possible.

One more thing, it's not illegal for banks to open accounts by mail. They just can't advertise this service. So to find a foreign bank that's willing to open an account for you "over the wire," you'll have to search for it yourself... or contact an international asset specialist like Joel Nagel. 

Sunday, March 28, 2010


Several weeks ago, we pointed to extreme amounts of bearishness toward the euro as reason to expect a natural "relief bounce" for the world's most hated currency.

This week, our "bounce theory" was trashed. After the tiniest of upward moves, the euro was slammed to a fresh 10-month low this week. This is a serious development for the debt-saddled Euro Union.

Old-school trader wisdom says when an asset cannot rally from a deeply oversold and deeply hated condition, it's a sign of extreme weakness... a sign the thing could even blow up.

The market always leads the news... so expect serious "default" and "bailout" headlines ahead not just from Greece, but other European nations, as the euro fabric comes unwound.

Saturday, March 27, 2010

Top global economist: Greece may get bailout, but default is inevitable

Greece may get a bailout, but its economic woes will eventually lead to default on its government debt, says Paul Donovan, deputy head of global economics for UBS.

For now, both the International Monetary Fund and euro zone nations will provide support for the beleaguered nation.

A bailout plan, hammered out late Thursday by euro zone nations, sets out...

Gold insider: IMF refuses to sell remaining gold

In an exclusive report, Kitco has just released yet another stunner in the world of precious metals.

It turns out that Eric Sprott has attempted to purchase gold from the IMF, according to information provided to Kitco by Frank Holmes, CEO of US Global Investors. "I just spoke with Eric Sprott, who bid to buy [the IMF's remaining gold on the block] and they refuse to sell it."

As Kitco points out, "the IMF might be holding out for a bigger buyer or a central bank or for higher prices. But Holmes argues the IMF's rejection of Sprott's bid means markets are being manipulated..."


For gold buyers, $1,050 is the new $900.

As today's chart shows, gold spent a good chunk of 2009 drifting around $950 per ounce. During this drift, gold dropped into the $900 area twice... which offered the gold buyer a chance to buy a little cheaper than the "normal" price of $950.

This "$950 is normal" period didn't last long, however. Gold staged an amazing three-month move from $950 to $1,200 late last year. This left gold incredibly "overstretched" to the upside.

Now that gold has had time to collect itself and "simmer" after its huge run, we see buyers and sellers are now comfortable with about $1,100 per ounce. The yellow metal has drifted along this level for four months... and a dip down to $1,050 is now the new bargain price for gold.

Financial Chaos: Why You Need to Own Stocks

Cost of living soars. There's surplus capacity in almost every industry and major corrections are likely. Currencies and bonds lose their purchasing power as governments inflate money supplies. People are hopelessly in debt... 10 times the normal levels. Millions go bankrupt... as do the businesses that extend credit without collateral.

Pretty dire, huh?

Sir John Templeton made these predictions on June 15, 2005. Templeton was one of the top investment legends of the 20th Century, equal in stature to men like J.P. Morgan and Cornelius Vanderbilt from the 19th Century. He built a billion-dollar fortune playing the stock market and selling mutual-fund investments to the public.

He put these predictions in a memo he wrote from his home in the Bahamas. In short, Templeton believed the peak of prosperity was behind us, dangers were more numerous and larger than at any time in the last 90 years, and countries around the world would experience financial chaos for many years.

The memo was lost and never published. Templeton died in 2008. The note resurfaced a few days ago...

You can read a full version of the lost memo, with some introductory notes by the first journalist to find it, here.

In hindsight, Templeton was right on target in his assessment of the world. The question is, how much more "financial chaos" is there still to come?

My DailyWealth coeditor Steve Sjuggerud thinks we've seen the worst already and the recession is behind us. Templeton says it'll last "many years." My personal observations lead me to agree with Templeton. The main reason is, thanks to the government's huge bailout, none of the excesses Templeton was so worried about have been resolved.

Take the homebuilding industry, for instance. Of all the industries that had overcapacity, the homebuilding industry was one of the worst. It built over 1.5 million new houses per year between 1998 and 2006. In 2005, it built over 2 million new houses. New home sales are currently running around 300,000 a year. In other words, there's almost seven times more capacity than the industry needs.

Yet, so far, not a single major homebuilder has gone bankrupt. The government recently bailed them all out with a massive raft of tax breaks and subsidies. And thanks to the huge stock market rally, they've been able to recapitalize themselves by selling more shares to the public. (You can read more about this in my colleague Frank Curzio's recent Growth Stock Wire essay here.)

Templeton's memo predicted this kind of absurd government support, too. "Voters are likely to enact rescue subsidies," he wrote, "which transfer the debts to governments."

So where does Templeton suggest you put your money to protect it from this financial chaos... Gold? Cash? Bonds?

Nope. Templeton likes stocks. Particularly, he likes businesses with perpetually wide profit margins and operations all around the world:

"Not yet have I found any better method to prosper during the future financial chaos which is likely to last many years," he says, "than to keep your net worth in shares of those corporations that have proven to have the widest profit margins and the most rapidly increasing profits. Earning power is likely to continue to be valuable, especially if diversified among many nations." In other words, if you're worried about continuing financial chaos, you should buy stock in Johnson & Johnson, Coca-Cola, Procter & Gamble, Intel, Altria, Philip Morris International, ExxonMobil, and Pepsi...

The beauty of this approach is, if Templeton is wrong and Steve is right, and the worst of our economic troubles are behind us, these stocks will still perform well. You win either way. 

Friday, March 26, 2010

This market is about to make an explosive move

Everything is lining up for an explosive move in Chinese stocks...

[The Shanghai Stock Exchange] peaked on August 2, 2009, and then plunged more than 20% over the next four weeks. Since then, Chinese stocks have mostly waffled back and forth, forming a series of higher lows and lower highs.

This action creates a "consolidating triangle" formation on the chart, where the support line is rising while the resistance is falling. Eventually, the two lines come together and the stock is forced to break out or break down from the pattern.

Thursday, March 25, 2010


With stocks and bonds up more than 50% in the past year, we find ourselves looking harder and harder for contrarians ideas... like utility stocks, which we presented last week.

We also find ourselves coming back to the "contrarian's commodity," natural gas. As our colleague Matt Badiali just outlined in Growth Stock Wire, the "clean cousin" of oil is nearing extreme levels of cheapness.

As Matt discusses, a large supply of natural gas has flooded the market in the past few years. This supply surge has altered an old ratio between oil and natural gas. Since these commodities are both used as fuel, they tend to trade in an energy-equivalent ratio.

During the late 1990s to the early 2000s, an oil-to-gas ratio of 12:1 or 14:1 meant natural gas was cheap. But "post supply surge," we need to see an oil-to-gas ratio of 20:1 or 24:1 to say gas is cheap relative to oil. This ratio reached a "super cheap natural gas" reading of 24:1 in the fall of last year. This extreme reading kicked off a more than 100% rally in natural gas... which brought this ratio back to a more normal 14:1.

But in the past few months, natural gas has tumbled more than 30%. This decline has sent the oil-to-gas ratio back into the 20s... near a "super cheap natural gas" level.

Buffett Is Now a Safer Bet Than Obama

It should go down as a historic moment...

But hardly anyone noticed.

The same day the health care bill passed, U.S. government debt lost its "risk-free" status.

That day, for the first time in over a generation, the U.S. government was a worse credit risk than a U.S. company.

Specifically, investors were willing to accept a lower interest rate to lend money to billionaire Warren Buffett's company, Berkshire Hathaway, for two years than to lend to the U.S. Treasury for the same period of time.

It shouldn't be possible... after all, the government prints the money... how can it be less likely to pay off its debts? But it makes sense on the other side, too. You can easily see how billionaire Buffett's company is less of an actual credit risk than our government, which is on the hook for tens of trillions of dollars of promises.

It's not even just the world's richest man who's grabbing lower interest rates than Uncle Sam... Heck, even home-improvement store Lowe's can borrow money at a cheaper rate than the U.S. government.

Here's how my good friend Porter Stansberry explained it earlier this week:

Congress says by spending an extra $1 trillion on health care over the next 10 years and raising taxes substantially (but only on the wealthy, of course), our annual deficits can be reduced... This has to be one of the most outlandish claims we've ever seen politicians make. It will so surely end up being a financial disaster that the bond market has actually begun to price government obligations at higher interest rates than highly rated private companies...

We believe the debt of nearly every government in the world will soon trade at a significant premium to the best-run private companies.

The reason is quite simple: As long as they don't have to pay for it, people will always vote for more government spending. That leads politicians to implement strategies that shield the true costs of government spending from the majority of voters – using debt and steeply progressive taxes. Today, roughly half of all Americans pay zero federal income taxes. As a result, it's not hard to win an election promising more things, like "free" health care.

This isn't really a political problem. It's actually an economic problem. There's a structural asymmetry between the people who approve the budgets (through elections) and the people who have to finance the budgets. Eventually, this will lead to a complete fiscal collapse. And it's going to happen a lot sooner than people think because the bondholders aren't stupid. They can see where the trend is heading. And that's why, as of today, it costs OBAMA! more to borrow money than Warren Buffett.

The problem is, once creditors begin to fear more and more paper will simply be printed to pay these debts (and, of course, that's what will happen), interest rates will rise. And they could rise suddenly. That would force governments to spend vastly more money on interest payments than they expect. That's the big problem right now in Greece, for example. I believe the U.S. will be spending close to 25% of its income tax receipts on interest by 2015. That's simply not sustainable.

The Obama administration believes the health care bill is "historic." Obama meant historic in a good way. The bond market recognizes it's historic in a bad way...

The passing of the legislation marked the first day in decades the bond market thought highly rated corporate bonds are a safer bet than the people who print the money.

The market decided a bet on bonds from our government is no longer risk free... It was a historic day.

The way to play it is simple, and you've heard it before... but it's right. Sell government bonds and buy gold (the currency that can't be printed). 

Interest rates surge after weak Treasury auction

Interest rates surged in the bond market Wednesday after a government debt auction drew only tepid demand for a second day.

The disappointing turnout for the Treasury Department's $42 billion auction of five-year notes raised the prospect that investors' appetite could be waning for Washington's IOUs. If demand for debt drops, the government would be forced to pay higher interest rates to attract investors.

Top currency hedge fund: Euro could plummet to parity with the dollar

John Taylor, chairman and chief executive officer of FX Concepts LLC, the world's largest currency hedge fund, sees the euro dropping to $1.20 by August, and believes parity is possible.

... More from Taylor: "It's going to be quick because things are really falling apart... Some of these [countries] have to be thrown out [of the EMU]...

Wednesday, March 24, 2010

Euro crisis update: Fitch downgrades Portugal's credit rating

European stocks sold off at 6am after Fitch downgraded Portugal’s credit rating to AA- from AA with a negative outlook.

They said “a sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness.”

Yields in Portugal are up about 3 bps and 5 yr CDS is wider by 7 bps to 140 bps. 


Today, we check in with one of the most important numbers in the world... the yield on the U.S. 10-year Treasury bond.

The "10-year" is the most widely followed gauge of how much interest Uncle Sam must pay to borrow money. Many analysts, like our colleague Porter Stansberry, expect this rate to head higher.

The higher interest rate argument says the U.S. government is racking up huge debts right now... and just as a bank would demand higher rates to loan money to the town drunk versus the town preacher, Uncle Sam's creditors will eventually demand higher rates as well.

Below is the past two years of the 10-year yield. In the last nine months, the 10-year yield has fluctuated between a high of 3.94% and a low of 3.17%. But in a series of "higher highs and higher lows," this number has crept back up to the 3.6%-3.8% area.

Keep an eye on this number. If it pops above its 2009 high and reaches 4%, it's a sign the "higher interest rate" crowd is right... and Uncle Sam is going to have some ugly interest payments ahead.

Tuesday, March 23, 2010


New investors often go through a three-step "lifecycle" in their stock selection methods. One, buy some fad shoe retailer or the company that makes the next great medical gadget. Two, lose money. Three, eventually come to this line of thinking...

"Forget 'new stuff,' I just want some Warren Buffett investments... boring companies that make soda, disposable razors, and band aids. Let me compound my money safely instead of losing on the next fad."

Last week, Tom Dyson outlined the incredible compounding power of cigarette maker Altria. Rather than try to guess the next consumer fad, Altria just sells millions of cigarettes every single day... just like Coca-Cola sells Coke... and Johnson & Johnson sells Band Aids.

Another example of the boring basics at work: Today's chart of America's largest funeral-home chain, Service Corp (SCI). No "next new thing" here... just a basic service everyone must deal with. SCI just reached a new high and sports one of the smoothest uptrends in the market. We're not saying buy the stock... We're simply pointing out that the "basics" approach works wonders. Everyone learns this principle eventually.

The dollar could be breaking out

After trading sideways for much of the last two months, the US Dollar index successfully tested its 50-day moving average last week and looks to be in the early stages of a new leg higher.

Greece is "one step from being unable to borrow"

Greek Prime Minister George Papandreou warned on Friday his country was one step from being unable to borrow and appealed to labor unionists to support his efforts to escape a debt crisis shaking the euro zone.

Speaking to the country's biggest union, GSEE, which has staged protests and strikes against his austerity plan, Papandreou said he was battling against vested interests at home and market speculators abroad.

The World's Next Credit Crunch Is About to Strike

One of the largest economies is about to declare bankruptcy.

How do I know? Here's what fund manager Takahiro Kawase had to say…

"The big change for us is that there's no new money to invest, so we may need to be a seller." With $1.37 trillion under management, Takahiro Kawase is the world's largest fund manager...

Uh oh. This is bad news. Today, I'm going to explain how this happens... and show you how to profit from it.

Kawase runs the Japanese public pension fund and has sole discretion over its asset allocation. This fund is enormous… bigger than the 2008 GDPs of countries like Australia, India, and Mexico. It is almost seven times bigger than top U.S. pension fund CalPERS, according to Bloomberg.

Kawase's favorite investments are Japanese government bonds. He has 70% of his portfolio in them. Needless to say, Kawase is the world's largest investor in Japanese government bonds.

Unfortunately, Kawase has to give up investing in Japanese government bonds and begin selling them...

Japan's aging society is the reason. Millions of Japanese are entering retirement and drawing pensions, Kawase has to pay their pensions. Meanwhile, fewer Japanese are entering the workforce, so Kawase's pension fund receives less money.

The result is, Kawase will have to start liquidating some of his Japanese government bonds and says his fund will be a net seller of bonds for the next few years.

If you thought the U.S. government was heavily in debt, you should see Japan. The Japanese government's debt has now reached $10 trillion... almost the same debt load as the U.S. government, except America's GDP is almost triple Japan's. Japan now has the world's highest debt-to-GDP ratio of any country in the world except Zimbabwe, according to the CIA World Fact/book.

Dylan Grice, an analyst at Societe Generale, says about a quarter of Japan's total debt load – $2.36 trillion – will reach maturity in 2010. In other words, the Japanese government has to find new investors for $2.36 trillion in debt – about 45% of its GDP – over the next nine months.

This huge debt rollover comes at the same time as the world's largest investor in Japanese government bonds has said publicly it won't buy any more... (Another huge investor in Japan also said recently it's considering selling Japanese government bonds over the next few years.)

I think the Japanese government is heading for a credit crunch either this year or next year. It won't be able to roll over its bonds, interest rates are going to rise to attract investors, the government won't be able to afford the interest, the debt load will get worse... and before anyone can patch up the problem, confidence in Japan's credit will evaporate. It'll be a nightmare a hundred times worse than the subprime crisis...

What's the easiest way to profit from this? Short the Japanese yen. It's going to implode when the Japanese government tries to inflate its way out of the problem. It's a good time to place this trade... The yen is close to an all-time high against other currencies.

FXY is the symbol for the Japanese yen fund… but the easiest way to place this trade is to buy YCS. It's a double-short Japanese yen fund that rises 2% for every 1% the Japanese yen falls. 

Sunday, March 21, 2010


"Thanks for the money, suckers."

That's what some might take away from our chart of the week, which displays the beautiful uptrend in one of our featured guests, the iShares Healthcare Fund (IHF). This fund is one of the broadest ways to get exposure to the health care industry.

Most political oddsmakers expect we'll pass at least a portion of the health care bill... and the "ultimate oddsmaker," the stock market, agrees.

The IHF, whose holdings stand to welcome millions upon millions of new customers, just struck a new 52-week high. With a gain of 73% in the past year, it's one of the top-performing sectors in the market. Boondoggle, here we come!

How to Protect Yourself and Prosper in the Coming Bear Market

It's not easy being financially illiterate.

Over three years ago, I began researching and writing about the impossible debt problems faced by several of America's largest and most trusted enterprises: General Motors, Fannie Mae, and Freddie Mac.

The hate mail came into my office by the truckload. I can sum up the sentiment as, "Porter... you're brain dead. You're un-American. You've lost your mind."

I wasn't digging up hidden, insider facts. I simply performed a basic analysis of each of these companies' ability to take in cash, viewed against its ability to pay out cash to its creditors. The only possible future for all three was bankruptcy. As you know, each of these stalwarts went under... while their stooge managers collected enormous salaries, smiled in front of the cameras, and told you everything was fine.

I tell you this story because I'm getting hate mail again... but my prediction of a U.S. government bankruptcy is much more serious... and the ramifications are much larger.

If you haven't read my writings on why I expect a debt crisis to crush the value of the U.S. dollar, I encourage you to do so here and here. It's the most important analysis I've ever done. Simply put, just like GM, the U.S. government has taken on ridiculous debts that it cannot pay back. But then the million-dollar question arises: If Porter is right, what do I do with my money?

Stocks are trading at big multiples to earnings. High-quality names and low-quality names are just too expensive right now to be bought safely. Volatility in the market has almost disappeared: Stocks have gone nowhere but up for nearly a year. Isn't that a sign I must be wrong about all of these financial problems?

Not at all. The huge run-up in equities we've seen over the last year is merely proof our central bank is still powerful. The stock market rebound that's lifted shares in the United States started the same week the Federal Reserve began its $2 trillion program of "quantitative easing" – which simply means printing up money and buying debts with it.

The Fed's program is scheduled to end this month. That's when we'll have our first real test of the true appetite for risk. I bet we see a big correction in the stock market at exactly the same time.

So the first thing to do is stay cautious of the stock market. Stick with stocks that can greatly increase earnings during an inflationary period and/or have a large and safe dividend stream to protect you against a bear market.

Next, one of my favorite trades here is a wager that gold (GLD) continues to outperform U.S. long-dated Treasuries (TLT) – which you can see in the chart below.

Over the last six months, we've seen gold outperform long-dated U.S. Treasuries by roughly 15%. I expect this trend to continue and accelerate over the next six months as the Fed stops supporting the U.S. Treasury market. Stay long gold, and stay long its hard-money cousin, silver.

Third, learn how to short stocks. Learn how to profit as stocks fall. You can find good explanations of short selling in any standard stock market or trading guide. When short selling, focus on companies that are frauds, overly indebted, or obsolete (for the "indebted" and "obsolete" columns, I like newspapers).

What most people don't understand about a period of increasing inflation is that even though growth in the money supply will increase earnings, matching increases to interest rates force equity valuations lower. And in the race between valuations and earnings, valuation almost always wins.

It's hard to make money in stocks (on the long side) if the market's overall earnings multiple falls in half. If stocks go from trading at 20 times earnings to trading at 10 times earnings (which is what I expect will happen), your stocks will have to double their earnings for you to merely break even, outside of what you're paid in dividends. So short sellers will have a tailwind at their backs.

As the great Richard Russell reminds us, "In a bear market, he who loses least, wins." I agree with Russell. It's hard to make money when markets fall. And while I can't guarantee sticking only with the safest stocks, betting on higher interest rates, owning gold and silver, and short selling stocks will make you rich, I can guarantee you'll be much better off than someone who ignores my advice... like the shareholders of GM did in 2008. 

Friday, March 19, 2010


The 10 Essentials of Forex Trading: The Rules for Turning Trading Patterns Into ProfitLast year, around this time, we were encouraging readers to take advantage of "rebound" trades, like gold stocks and emerging market stocks.

These assets suffered in late 2008... and classic traders' wisdom tells us assets that suffer the most in a decline tend to rebound the hardest during the subsequent rally. Our recommended rebound trades produced gains of more than 100%.

Nowadays, we find ourselves in a much different situation. Stocks have soared in the past 12 months. The benchmark S&P 500 is up 47%. Some sectors, like transportation and real estate, are up more than 70%. What's the contrarian – who likes to buy unpopular assets – to do?

Today's chart says, "Want something unpopular? Check out the utilities." Utilities are basic industries that produce electricity and clean drinking water. They grow at slow rates and distribute a good portion of their profits to shareholders. And while most every sector you can think of has gained at least 50% in the past year, the big utility fund, XLU, has returned "just" 24%... and many of its holdings pay dividends over 5%.

What to Do About the Euro Now

Three months ago, everybody hated the U.S. dollar...

The consensus was near unanimous. Investors were certain the dollar was doomed.

Where did investors put their money to avoid the certainly-doomed U.S. dollar? In euros...

We did the exact opposite... In my newsletter True Wealth, we bet against the euro in a very safe way. Readers are now up about 10% in three months.

But what's this? We're seeing a completely different situation today from what we saw three months ago...

Investors now HATE the euro. And they (surprisingly) love the U.S. dollar. Investors have bought dollars and short-sold euros in record amounts (even more so than a month ago). Take a look at how far the euro index has fallen since late November...

The extreme we're seeing is typical of turning points in a currency's trend. So I fully expect the euro to have a violent bounce to kick out all these short-term traders. The euro has already ticked up above its bottom in February.

Most people trade currencies with a huge amount of leverage. A couple-percentage-point move could wipe them out completely. And I expect it will.

So is it time for us to abandon our trade in True Wealth? This is a fantastic question...

It all comes down to your timeframe and risk.

If you're a short-term trader, trading with a lot of leverage, you need to get out of the trade now. The cards are stacked against you. Too many people are betting against the euro... They could kick off a violent rally in the euro as they try to get out of positions that are going against them. So I wouldn't fault you if you took the three-month 10% gain.

But if you have a longer-term perspective and you are not wildly leveraged – which is where we are in True Wealth – then you can just ride it out. A couple-percentage-point move is just a setback. (I could also be completely wrong about a violent move up in the euro... The historical precedent isn't 100% here.)

My two cents on the euro situation right now is that heavily leveraged bets against the euro will get wiped out, and soon. Then the euro will be back on its downtrend. 

Thursday, March 18, 2010

Forget Greece... this country could end the euro

Technical Analysis for Daytrading of Forex & Futures (Volume 1)Wharton is warning markets to keep a very close on Spain right now. That's because while a Greece or Portugal financial melt down might be manageable, a Spanish one could have massive negative repercussions for both Europe and the global economy.

This is due to the massive size of both Spain's economy and debt:

If Spain fails to execute a credible plan to cut its budget deficit, the worries over sovereign solvency will spread quickly beyond the small, peripheral countries currently making the most headlines, experts warn. A Spanish default could herald the breakup of the euro.

Energy breakthrough could give U.S. massive supplies of cheap oil

Essentials of Foreign Exchange Trading (Essentials Series)Canada has more energy in its "proven, recoverable" reserves of coal than it has in all of its oil, natural gas and oil sands combined: 10 billion tonnes.

The world has 100 times more: one trillion tonnes. These reserves hold the energy equivalent of more than four trillion barrels of oil. They are scattered in 70 countries, mostly in relatively easy-to-mine locations and mostly in democratic countries.

The United States alone has 30 per cent of the world's reserves, and scientists in Texas say they have found a way to convert coal into gasoline at a cost of less than $30 (U.S.) a barrel.


Forex Patterns & Probabilities: Trading Strategies for Trending & Range-Bound Markets (Wiley Trading)Study the market for a few months, and you're bound to come across the idea of "Dow Theory."

Charles Dow is the legendary founder of both the Wall Street Journal and the Dow Industrials Average. There are several ideas contained in his Dow Theory system of market analysis, but one of the main points is to monitor both industrial shares (the manufacturers of goods) and transportation shares (the transporters of goods). This gives the investor a "big picture" view of the economy and stock market. Dow said if both manufacturers and transporters were enjoying higher stock prices, they were "confirming" a bull trend.

You probably know the Dow Industrials is near a yearly high. Today's chart displays the other side of the equation, the Dow Transportation Average. This index tracks America's largest railroad, trucking, and freight companies. It just broke out to a new yearly high.

Some of the smartest investors in the world are calling for stocks to head lower... and at least in the very short term, the market is extended to the upside. But looking at things from a wide perspective, we can see the Fed's gigantic E-Z-Credit program has goosed the economy into high gear... and the trend is UP.

Congress pushes U.S. closer to all-out trade war

Kindle Wireless Reading Device (6" Display, Global Wireless, Latest Generation)China said on Wednesday it "could not be any clearer" in its repeated commitment to a stable exchange rate after the U.S. Congress threatened to levy duties on some Chinese exports if it fails to revalue its currency.

The temperature in the long-running dispute over China 's exchange rate regime is rising quickly, with a bipartisan bill introduced on Tuesday in the U.S. Senate that aims to get Beijing to let the yuan rise.

Focusing on the yuan will not help to solve problems in the Sino-U.S. bilateral trade relationship, a Chinese commerce ministry official told Reuters.

"We oppose the over-emphasis on the yuan's exchange rate," the Chinese official said, when asked about the bill.

Wednesday, March 17, 2010


The latest development in the "financials trade" we discussed early this month: XLF is moving in favor of the bulls.

Several weeks ago, our colleague Jeff Clark argued the financials were likely headed lower in the next few months. We also noted that John Paulson, a guy some consider to be the world's best, richest speculator, is betting heavily on the financial sector rising this year.

There's an easy way to tell who's right on this one... watch the big financial fund, XLF. This fund is loaded with the biggest names in American finance. As we noted earlier, XLF has traded in a tight range between $14 and $15.50 per share since August. A fresh "breakout" in either direction would tell us who is right... at least for a few months.

As you can see from today's chart, XLF is not just "knocking on the door" of $15.50, it's pounding on it. Shares have enjoyed a big rally, climbing within a whisker of their October 2009 high. A break above $16 puts this asset back into an official bull trend... and lets us know the great "handouts and bailouts" program is keeping asset prices afloat.

Tuesday, March 16, 2010

It's official: China now dumping the dollar

China retained its spot as the biggest foreign holder of U.S. Treasury debt in January although it trimmed its holdings for a third straight month.

The string of declines is likely to underscore worries that the U.S. government could face much higher interest rates to finance soaring budget deficits.


As we've been highlighting in our "New Highs of Note" column each Monday, America is finally getting back down to the "consuming business." Fast food, department store, shoe, and gadget stocks are soaring right now.

Leading the pack is Disney. Like the share price and profits of Home Depot, Disney is an excellent measure of how flush the American consumer is feeling. Disney owns television networks ESPN and ABC... a hugely successful movie business... amusement parks... and the merchandising rights to it all. This pile of assets is good for more than $30 billion in annual revenue.

It's also good for a remarkable recovery. As you can see from today's chart, Disney's share price has completely recovered to pre-credit-crisis highs in the mid $30s. Not many stocks can make this claim.

Considering this chart, we have to repeat our claim from a previous Home Depot column... Sure, you can be bearish on America all you want. The government's "handouts and bailouts" policy will end in a debacle. But it could take a long time for that debacle to happen. As long as stocks like Home Depot and Disney are soaring to new heights, the government-sponsored boom is still working.

Google loses showdown with China

The FT reports that Google (GOOG) has made all the necessary plans to close its Chinese search engine business and is “99.9%” certain it will shut the operation down shortly.

Li Yizhong, minister for industry and information technology, told Google that it could not violate local laws which means that it must censor its search results in the country. Google management has stated that it wants to stay in China but is unwilling to censor results. The current friction between the search engine and government began when hackers broke into Google servers in China and compromised some Gmail accounts. The hackers have not been identified.

The Chinese seem to have won the confrontation...

World's best trading firm: The euro is going to rally

... We realise that this will be a controversial view given the real and ongoing issues around sovereign risk and the European outlook. While we do see sustainable Dollar strength in the more distant future, we think the short-term pressures are likely to reverse.

Two key forces have led the EUR/$ from 1.51 to current levels; relative growth surprises between the US (positive) and the Eurozone (negative), and the fiscal tremors emanating from Greece. After a new set of fiscal measures announced by the Greek authorities, and their endorsement by members of the Eurogroup and the ECB, the risk premium has...

Sunday, March 14, 2010


The rest of the world is throwing a stock-market party. Everyone got an invitation... except China. This is the idea behind our chart of the week.

From the U.S. to Canada to Brazil, stock markets are either at or near yearly highs... and the pretty people on CNBC are ecstatic again. But as you can see from our one-year chart of the benchmark Shanghai Composite, Chinese stocks are struggling right now.

Those bearish on China would tell you this "rest of the world strong, China weak" development means serious trouble is ahead for China's overheating economy. Those bullish on China will say this market is simply taking a "breather."

Either way, keep an eye on this important index. Late last year, it made three attempts to best its August high (red arrows). Each one failed more miserably than the next. If it breaks the February low (blue arrow), we'll be trading on the bears' side.

Saturday, March 13, 2010


Energy investors shouldn't just focus on oil sands right now. As the chart below shows, its cousin natural gas is "supercheap" these days.

Longtime DailyWealth readers know we encourage folks to view the world through several different "lenses," one being the price of gold. By using gold as a "gauge" to value various assets like land, stocks, currencies, and other commodities, you can filter out the declining value of paper currencies. It's no magic pill for making great investments, but it can give you a great "real money" guide for buying cheap assets.

Count natural gas in the "cheap asset" category right now. The chart below displays the past 10 years of natural gas trading in terms of gold. As you can see, natural gas fluctuated around the same value versus gold from 2002-2008. But in 2008, lots of new natural gas supplies came online, while gold soared in value. This "natural gas down, gold up" situation has left the clean fuel near historic levels of cheapness.

This is no call for a big rally in natural gas... We're simply pointing out that natural gas has been clobbered in the past year. If you're a contrarian, you're interested in natural gas...

The U.S. is moving towards a currency war with China

The United States should not make a political issue out of the yuan, a Chinese central banker said on Friday, as the two countries lurched towards a potentially serious clash about Beijing's currency regime.

People's Bank of China Vice Governor Su Ning was responding to a question about remarks on Thursday by U.S. President Barack Obama, who called on China to move to a "more market-oriented exchange rate."

Speaking on the sidelines of China's annual session of parliament, Su said the United States should look to itself to boost its exports and not cast blame on other countries.

Friday, March 12, 2010


In mid-December, we nailed the textbook "1-2-3" trend change in the euro... the pan-European currency everyone loves to hate right now.

Back in December however, the euro wasn't so hated. The currency's value was near a yearly high... It was the U.S. dollar and the monster debts behind it that folks hated. But just after our column, the Greece debt problem hit the headlines. Sentiment and trend changed in a big way. The euro fell 6% in two months... which is a drastic decline for a major currency.

But now that "euro implosion" and "Greek debt crisis" are regular evening news fare, everyone is bearish here. Big hedge funds are holding a record amount of bearish bets against the euro. In a great departure from mid-December, it's now one of the most popular trades in the world.

Bottom line? Long term, the euro, like all paper currencies issued by spendthrift governments, is headed lower. But short term, everyone and their brother sees the euro as a can't-miss short right now. The market is set to do what comes naturally... which is to soak as many people as possible. Get ready to see a euro bounce.

The Giant Financial Risk You'll Never Hear About on Television

From 20 miles in the air, the Musandam Peninsula doesn't look like much.

Sparsely populated and dominated by the Al Hajar mountain range, little happens on the Musandam that matters to the outside world. Some fishing, tourism, and petty smuggling are about all that goes on in this tiny region belonging to Oman, the southeastern-most country on the Arabian Peninsula.

But the desolate landscape belies the Musandam Peninsula's critical role in global politics and industry...

The U.S. government has a massive contingency plan to defend the area... and investors must pay close attention to the peninsula for the same reasons our government does.

Investors must know about the Musandam Peninsula because it juts out into a waterway locals know as Tangeh-ye Hormoz. For thousands of years, this waterway has held vital strategic significance for regional powers looking to control sea access to the Arabian Peninsula, the Persian coast, and ancient Mesopotamia.

Notice... I said "regional," not global. Neither the U.S. nor any other significant economic power obsessed over it until the dawn of the hydrocarbon age, around 100 years ago.

Nowadays, the Tangeh-ye Hormoz is one of the world's biggest geopolitical trump cards... and it poses a great threat to your financial wellbeing.

You see, this body of water serves as the transit point for more than 16 million barrels of oil per day... more than 40% of the world's daily consumption and 64% of the oil produced in the Middle East. More oil flows through this area daily than is consumed by China, India, Japan, and Germany combined.

The Musandam Peninsula is the constriction point that "chokes off" the waterway Westerners now call the Strait of Hormuz. And the regions it controls sea access to? That's modern-day Saudi Arabia, Iraq, and Iran. This makes it the most important waterway in the entire world.

The Strait of Hormuz is also Iran's trump card in its desire to go "nuclear."

The great concern here for the U.S. government – and investors – is that Iran could use boats, missiles, mines, or a combination of all three, to attack oil tankers in the Strait... just in case Iran is attacked. Even a small success here for Iran could send the price of oil past $200 a barrel... which would strangle our fragile economic recovery.

The potential solutions to this problem on the table right now are: 

1) The U.S. attempts to knock out Iran's nuclear capabilities. 
2) Israel attempts to knock out Iran's capabilities. 
3) We bluster and clench our fists, then ultimately allow Iran to have nuclear capabilities.

It's the biggest "darned if you do, darned if you don't" situation in the world. Here's why...

An attack designed to destroy Iran's nuclear capabilities isn't 100% guaranteed to work. We don't have complete intelligence on the locations and extent of Iran's facilities. Even if the world knew exactly where all the facilities were, we couldn't be sure attacks would take them out completely. You'd have to invade the country and inspect the damage from up close.

Less than 100% isn't good enough here. A failed attack would immediately place Iran into "war mode," which would destabilize the Middle East and enrage the Muslim world... something the U.S. doesn't want. One of the first moves for an Iran in war mode will be an attempt to shut down the Strait of Hormuz.

An attack would also send lots of young Middle Eastern men and money running for the terrorism business. America has worked too hard, risked too many soldiers' lives, and spent too much money to risk a terrorism renaissance.

So if an attack fails, you'll have a terrible version of what I just described. If you don't attack, you have a nuclear-armed Iran. Like I said, darned if you do, darned if you don't.

I think diplomacy is the likely outcome here. But you're crazy not to buy some financial insurance in case this situation is not resolved without missiles. After all, we're talking Israel, Iran, and the U.S. here. These nations did not get where they are today by sending Hallmark cards and asking "pretty please."

If this conflict goes "hot," safe oil and gas assets will soar in price... the kind far away from the Middle East and its problems. 

Thursday, March 11, 2010


Today's chart shows why we love to trade Chinese stocks.

The smart investor's job is simple: Find incredible compounding vehicles like Johnson & Johnson, buy them at the right price, and hold for years. The smart trader, however, has different job: Find assets that boom and bust like crazy.

As today's chart shows, China belongs in the "likes to boom and bust" column. Below is the past year's trading in Baidu, the No. 1 search engine in China. You could call it the "Google of China." The stock is up nearly 250% in the past year.

We're fair China hands here at DailyWealth. We called the 2007 boom... then flip-flopped and called the 2007 bust with commentary on China's big airline stock, China Southern. We also called the recent Hong Kong boom, which produced huge gains.

Much like biotech and small mining stocks, Chinese stocks tend to draw huge amounts of public interest. Hundreds of millions of consumers entering the global economy is a big story. This story creates enormous uptrends in the best Chinese companies, like Baidu. It also creates situations of excessive optimism and overvaluations, like Baidu. We can't tell you when the next bust will come, but it will come. It will be bad... and then it will be time to buy again.

Wednesday, March 10, 2010

What China Wants More Than Physical Gold

"A few factors limit our ability to increase [our] investment in gold," China's Chief foreign exchange regulator Yi Gang said in a speech this week.

Investors have long speculated China will start buying gold and selling its hoard of U.S. dollars at some point. (China's hoard could be literally trillions of U.S. dollars.) It would be the first step in a "Doomsday" scenario...

China trades in its dollar reserves for gold... The value of the dollar crashes... And U.S. interest rates soar, as China is no longer willing to buy U.S. government Treasury bonds.

Some investors have said China has a perfect way to do it, available right now. The International Monetary Fund (the IMF) has a near-200-ton hoard of gold that it wants to unload.

But if China actually used all its dollar reserves to buy physical gold, it would completely overwhelm the market. It would end up trying to buy about a third of all the gold ever mined in the history of the world. There's no way it could get all that gold without sending the price to outrageous levels.

It seems Mr. Yi recognizes that. He essentially said gold is too volatile, the historic returns aren't that great, and any gold buying by China would "certainly" increase gold prices.

If Mr. Yi is to be taken at his word, in short, China doesn't have plans to buy much gold in the open market.

Mr. Yi's comments are in line with recent comments from the China Gold Association, who told The China Daily newspaper that it is "not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility."

So how would China acquire gold if it doesn't buy it?

This is where it gets interesting...

Instead of buying physical gold in the open market (where China would be the 800-pound gorilla in the room), China plans to buy gold mines around the world.

An official from the China Gold Association told The China Daily that rather than buy gold from the IMF, China would buy gold directly by buying gold mines "abroad."

If that's true (and there is some sense to it), then how should you play it? Dennis Gartman reported on this yesterday, in his Gartman Letter:

Perhaps we are to begin owning gold mines rather than gold futures of gold ETFs. We have avoided owning mines for years, preferring the "purer" play of owning gold rather than the mines, for we fear being exposed to poor mine management, or accidents in a mine that might do damage to the equity while gold itself moves higher. But if the Chinese authorities want to own mines, perhaps we have to consider doing so also...

I've done more than consider buying gold mining companies... In the latest issue of True Wealth, I recommended buying gold mines as the best way to have exposure to gold right now.

The reason is simple. This chart sums it up:

Gold is up 70% since the summer of 2006. Meanwhile, gold stocks (as measured by the Gold BUGS Index) have done nothing.

Usually, a 10% move in gold would mean a 20% move in gold stocks. But this relationship broke down in the financial crisis. Now, either the price of gold needs to crash... or the price of gold stocks needs to soar to correct this anomaly.

The timing might be just right... Gold mining stocks are down, and it's just coming to light that the Chinese prefer to buy gold mines (which give the country a permanent supply) over buying gold in the open market.

Time to buy gold stocks.