This Rare Anomaly Says Stocks Can Jump 15% in Three Months

 
The "Melt Up" is here, my friend.
 
You can either get on board… or let the market pass you by. And right now could be the beginning of the next leg higher for the Melt Up.
 
You see, the tech-heavy Nasdaq Composite Index – the leader during the last Melt Up – just saw a rare anomaly.
 
This rare event hasn't happened since February 2015. (Before that, it hadn't happened since 2009.)
 
History says it'll likely lead to big returns… Gains of 15% in just the next three months are possible. It's the next leg higher in the Melt Up.
 
Let me explain…
 
We're in the late innings of a historic bull market. But the boom isn't over yet.
 
As my colleague Steve Sjuggerud has explained… the biggest gains come in the last few innings… when the market "Melts Up" before suffering a major "Melt Down."
 
We're smack in the middle of the current bull market's Melt Up. But history says it's not over yet.
 
One reason is a rare anomaly that happened in the Nasdaq. The index recently moved higher for 10 straight trading days.
 
That's a rare feat. As I mentioned, it has only occurred two other times during the current bull market.
 
You can see the recent run in the chart below…
 
The Nasdaq moved higher every single trading day from July 7 to July 20. The current market uptrend is strong.
 
Of course, even during a strong bull market, stocks usually have plenty of down days. The recent run is a rare anomaly… And one we should pay attention to.
 
In short, stocks tend to keep going up after these rare strings of consecutive up days. The table below shows what similar extremes have meant for the Nasdaq since 1971. Take a look at the returns…
 
 
1-Month
3-Month
After extreme
2.3%
14.6%
All periods
0.7%
2.3%
Again, this is a rare anomaly. It's happened less than 1% of the time since 1971. But it's also occurred before big gains in the Nasdaq.
 
Specifically, buying after the Nasdaq jumps 10 days in a row has led to a 2.3% gain in one month and a staggering 14.6% gain in three months.
 
A gain of 15% in three months seems like a crazy prediction… But the Melt Up is in full effect… and history points to big gains after this rare anomaly.
 
Now isn't the time to be timid and sit on the sidelines. It's time to be bold and buy.
 
Get out there and do it.
 
Good investing,
 
Brett Eversole
 
P.S. Stocks are headed higher – much higher – during the Melt Up period. In fact, we believe the Dow could soar past 50,000 before the bull market dies. Steve recently explained all of the moves investors need to make to capitalize on the Melt Up in a short video presentation. Watch it for free right here.

Source: DailyWealth

These Three Industries Could Explode in the Coming Years

 
Today, China is on the verge of something similar to the U.S. in the 1950s…
 
In 1950, the United States was on the cusp of a boom that would produce the largest middle class in history. It was also the beginning of a surge in the U.S. economy that would make it one of the richest countries ever.
 
In 2000, just 4% of China's urban population was considered middle class. By 2022, that figure will soar to 76%. That's more than 550 million middle-class people in China.
 
To put this in perspective, its middle class will be 1.7 times the entire population of the U.S. A growing middle class means Chinese consumer spending will surge, too. It's set to increase 55% between 2015 and 2020.
 
This means plenty of great opportunities if you're looking for a Chinese stock to buy.
 
And just like the U.S. did during its boom that started in the middle of the last century, China's middle class is set to spend its money in three key areas…
 
Right now, the Chinese government provides some form of health insurance to almost all of its 1.4 billion citizens. But public health care is a mess…
 
The country simply has too many patients for the poorly paid public doctors to care for. As a result, most Chinese citizens face long lines and poor standards of care.
 
Distrust and frustration often boil over to the point where people humiliate or attack medical personnel when they feel their loved ones have been mistreated or neglected.
 
For the typical Chinese person, a trip to a public hospital is unpleasant at best and a nightmare at worst… With more money, the middle class is demanding better health care.
 
Consulting firm McKinsey & Company estimates that the middle class will drive private health care spending in China to $1 trillion by 2020, up from just more than $350 billion in 2011.
 
The Chinese government is keenly aware of the frustrations of its citizens.
 
So in 2011, the government took the first steps to allow private ownership of hospitals. As a result, 2015 marked the first time that the number of private hospitals accounted for more than half of the entire market.
 
Still, the volume of services delivered by these small, private providers only accounted for 15% of the total amount of services provided to Chinese families.
 
Tons of room for growth exists in this sector.
 
Meanwhile, China's growing middle class is also rapidly spending more money on education and tutoring.
 
Parents are worried their children will have to compete even more fiercely for good jobs than they had to in the past. And the Chinese economy is shifting from manufacturing toward services. That means the definition of a lucrative job is rapidly changing.
 
So parents are enrolling their children into the best preschools, middle schools, high schools, and universities that they can afford. They're also paying for extra tutoring.
 
According to consulting firm Deloitte Research, the Chinese education sector will expand at a 12.7% compound annual growth rate over the next three years to generate revenue of nearly $440 billion in 2020. In fact, Deloitte calls this the "golden age" in Chinese education.
 
Finally, you can also find a great stock to buy from the growth in China's restaurant industry. The Chinese middle class – increasingly urbanized and pressed for time – is spending its new money on fast food.
 
According to market-research company IBISWorld, over the five years through 2016, revenue in the Chinese fast-food-restaurant industry has grown at an annualized rate of 10%. That number is expected to grow as the middle class does.
 
As a result, many Chinese fast-food restaurants are about to see their profits soar… along with their share prices.
 
These three industries – health care, education, and fast food – are creating massive opportunities for investors. They give you more profitable options when you're looking for the next best Chinese stock to buy.
 
Good investing,
 
Kim Iskyan
 
Editor's note: Kim and his research team believe the expanding Chinese middle class will lead to massive gains in these three industries over the next year. They've uncovered a handful of the best ways for you to get started. For a limited time, DailyWealth readers can gain access to all their research for less than $2 per week. Get all the details right here.
 

Source: DailyWealth

How to Invest During the 'Post-Truth Era'

 
We're riding a historical era of low volatility and market fluctuations.
 
The S&P 500 hasn't made a 5% pullback since July 2016.
 
And the current low market volatility and higher valuations have been a puzzle for investors…
 
Political uncertainty seems high. Domestic politics haven't been this tumultuous in decades. That's spreading into foreign policy. Great Britain is leaving the European Union. Russia is manipulating the world via the Internet. Bitcoin is soaring and North Korea keeps firing off wobbly missiles.
 
How are the markets remaining so calm?
 
We don't think investors are complacent. We think they're confused.
 
As legendary value investor Benjamin Graham explained, you can think of the market as a weighing machine in the long term… But in the short term, it's a voting machine. It tallies everyone's guess about the future and spits out a price. When investors get information that shifts their view, the market moves…
 
But in the "post-truth era," information ain't what it used to be.
 
For investors, the regular flow of mainstream information has become worthless…
 
Think about it. When Obamacare is being repealed one day, then the bill gets dropped, then it comes back in a different form, and then stalls in the Senate, what should you expect from health care stocks? When the next headlines hit the news cycle, investors won't react because they don't know what's real and what's not.
 
The same goes for Wall Street regulations, coal prices, and everything else that becomes an issue in the media.
 
All told, we don't think the lack of volatility stems from investor complacency… We think the lack of volatility causes the complacency. There is a dearth of valuable information. And when markets don't move, investors get complacent.
 
Of course, there's a way to navigate the new era of strange, polarized, and indecipherable information…
 
When there's a lot you can't know… you must focus on what you can know.
 
For years now, we've lamented that the market was all "macro." Breaking down businesses and snooping out value did little to contribute to earning extra profits. You were either long stocks or you weren't. You either bought tech or made the right moves on oil… or you didn't. Correlations between stocks soared, and momentum kept pushing everything higher.
 
Had you simply bought an S&P 500 index fund at the bottom of the market in 2009, you'd have earned 327% through last month, including dividends.
 
Now, in the post-truth era, the broader trends are harder to suss out.
 
While we argue that the market's confusion has kept volatility low, stock prices have still marched up. That's due to one simple fact…
 
With little else to go on, investors have focused on earnings. That's good. Earnings are what matter. And they've been growing at strong levels…
 
In the first quarter of 2017, earnings grew 17% year-over-year. That's the highest reading since 2010. A full 75% of companies announced earnings that matched or exceeded expectations, led by tech stocks, health care, and financials.
 
And the early numbers for this quarter are looking even better.
 
The most valuable insight from these earnings is the revenue. Over the past 12 months, revenue per share has risen 3.8%… what looks like the start of a strong upcycle in revenue growth.
 
This is a change from much of the past decade…
 
Much of the S&P 500 earnings growth in recent years hasn't been from growing sales, but from tightening up waste to boost profit margins. But improving margins by those methods is unsustainable. We want businesses with growing sales.
 
Margins from earnings before interest, taxes, depreciation, and amortization (EBITDA) have risen from 16% in 2009 to 18.7% in 2016 as businesses have gotten leaner. And margins still have room to grow before they hit the highs we've seen in past business cycles.
 
That's enough of a reason for stocks to keep grinding higher. But another one is that folks are out there buying…
 
Consumer expenditures have grown 3% over last year, after inflation. That's within the steady band of 2%-4% growth we see during strong economies.
 
More broadly, private fixed investments – businesses making capital investments to increase production or expand – leapt to 4.2% growth in the last quarter. That's a big upturn and a great result for a number that's been stubbornly low for two years.
 
To summarize, we're in the "Goldilocks" part of the earnings cycle. Growth is picking up, but none of the measures look overheated.
 
Quality earnings will drive stocks going forward. We're already seeing it happen. So today, we'll be rewarded more by focusing on businesses again.
 
Here's to our health, wealth, and a great retirement,
 
Dr. David Eifrig
 
Editor's note: Dave's latest research shows that Trump is planning a new "citizen bailout." The last time this happened, you could have collected payments of $1,383… $2,844… and $3,620 while barely lifting a finger. But to qualify, you must make one move soon. The deadline is fast approaching. You can learn all the details in this special presentation, right here.

Source: DailyWealth

Quizzed at the Urinal

 
When I can't even use the restroom in peace, I know we're at the top of the market…
 
I know how "hot" an investing idea is the moment I step off the podium after giving a speech.
 
If I draw a huge crowd right after speaking, and people are asking a ton of questions about exactly how to take advantage of the idea, then I know we're getting close to the top.
 
The craziest time was when the questions continued even as I made my way into the restroom – and even as I stood at the urinal. Then I knew the idea was at a top.
 
I tell you this because I spoke at the Vancouver conference this week (it's actually called the Sprott Natural Resources Symposium, but most people call it the Vancouver conference).
 
This year, I talked about the "Melt Up." And the response told me a lot…
 
The conference is always a fantastic event. And the Vancouver area is my favorite place in the world in the summertime…
 
The day before the conference, I went downhill mountain biking on the B-Line at Whistler – which is incredibly thrilling, to me, at least. And here's a cellphone photo from the Sprott Boat Cruise we took after the first day:
 
What's not to like about this part of the world, this time of year?
 
This time around, I talked about the Melt Up.
 
I shared this chart, which shows that the Nasdaq went up 100% during the final year of the last Melt Up… and that most of those gains really happened in its last five months. Take a look:
 
I said that I expected we could see a similar type of Melt Up this time around.
 
Nobody cared…
 
Instead of getting mobbed by an excited crowd… "How do I trade it?"… "What do I buy?"… Nobody really asked me anything afterward. I got "crickets."
 
It's all right. I know what it means. It tells me that nobody cares about U.S. stocks. Still.
 
It blows my mind. We're more than eight years into this bull market – and nobody cares about stocks yet. It's shocking.
 
It's not just individual investors. Fund managers feel the same way. My friend David Tice, an investing expert and former manager of the Prudent Bear Fund, tells me that "U.S. fund managers haven't been this underweight U.S. stocks since 2008."
 
It's crazy.
 
It also tells me that there's still PLENTY of upside left in U.S. stocks.
 
Remember the market peak in real estate, when EVERYBODY was "in real estate"?
 
I expect we will have a similar feeling about the stock market when it peaks. We are still a long way from that.
 
Again, I can tell how popular an investing idea is by the size of the crowd I draw after I step down from the podium. This week, I talked about my Melt Up thesis – and nobody cared.
 
When U.S. stocks get so popular that I'm still getting questions all the way to the urinal, I will let you know… We are definitely not there yet. There's still plenty of upside ahead…
 
Good investing,
 
Steve
 
Editor's note: Steve believes the Dow could soar past 50,000 before this bull market finally comes to an end. He explained all the details in a recent interview, including why investors who make the right moves now could see hundreds-of-percent gains from here. Click here to view it now.

Source: DailyWealth

Protecting Your Portfolio Has Never Been Cheaper

 
Bull markets are wonderful…
 
You get to watch your stocks rise in value, of course.
 
But bull markets – especially the current one – come with another major benefit.
 
Most folks overlook it because they don't want to buy assets that are underperforming stocks. And even fewer are ready to buy assets that are likely to lose money as the bull market continues.
 
And that's a wonderful thing… because it means "portfolio insurance" is dirt-cheap right now. By some measures, it's nearly as cheap as ever before.
 
Today, I'll explain how it works – and why you should strongly consider it now, while it's cheap. I'll also point you to the best place to go for advice on how and what to buy.
 
This wealth-protection strategy is buying long-dated put options. The idea is simple…
 
When you buy a put option, you buy the right – but not the obligation – to sell a stock at a fixed price for a set period of time.
 
For example, you could buy the right to sell shares of tech giant Apple (AAPL) at $100 at any time up until January 2019. (Let's say buying that right would cost you about $2.20 per share.)
 
If you own the stock, this puts a "floor" under your shares (at $100) because you have the right to sell the stock at that price. That's one way these puts can act as a form of insurance… But it's not the one I'm talking about today.
 
If you don't own the stock, buying a put serves as a bet that the stock will fall…
 
Sticking with the example above, let's say you believe that Apple will burn through its $257 billion in cash, competition will drive the company into the ground, and it will go bankrupt within the next year and a half.
 
You ignore the critics and buy the Apple January 2019 $100 puts for $2.20.
 
To the great surprise of everyone (but you), Apple goes bankrupt and shares drop to $0. The puts you bought for $2.20 per share are now worth $100 per share. A $220 bet turns into $10,000. A $660 bet turns into $30,000. It's a 4,445% return.
 
In a bear market, that one small bet goes a long way toward helping you preserve or increase your wealth.
 
Now… I chose what is probably the least likely company in the world to go bankrupt before January 2019. But other companies are much more likely to meet their end in that time. If you buy puts on a bunch of them and a few work out, you'll do wonders for your portfolio.
 
Now that you know how buying long-dated puts works as portfolio insurance, I want to explain why they're so cheap right now…
 
It has to do with the Volatility Index ("VIX"). Traders often call it the market's "fear gauge" because it rises when folks are worried about stock prices dropping, and it falls when they're not.
 
The VIX works by measuring prices that people are willing to pay for options.
 
As we just covered, people buy put options when they're worried about a crash. Put prices rise with demand… and that makes the VIX rise, too.
 
But right now, as you can see in the chart below, the VIX is near its lowest level ever. (It hit its second-lowest level in history, 9.36, on Friday.)
 
We used monthly data rather than daily data for this chart so the line would be clearer. But the VIX dropped below 10 in early 2007, not long before the market topped out. And the VIX peaked at 80.86 in late 2008, just before the market bottomed.
 
In other words, people are often willing to pay the most for portfolio insurance when they least need it… And they're often not willing to pay low prices when they need it most.
 
It doesn't always work out like that. Sometimes the VIX drops just before stocks make a huge run higher. That's what happened after the VIX hit its lowest level ever in 1993.
 
But the fact remains, portfolio insurance is dirt-cheap today. You can ignore it… Or you can dramatically reduce your risk with very little money.
 
Good trading,
 
Ben Morris
 
P.S. My publisher Porter Stansberry and his team of analysts have dedicated an entire research service to buying long-dated puts. They're targeting the companies that are most likely to default on their debts and go bankrupt – even if the bull market continues. But in a market crash, this service is designed to help you not only survive, but make 10-20 times your investment.
 
I love this strategy… And with portfolio insurance almost at its cheapest level ever, this is the ideal time to use it. The service is called Stansberry's Big Trade. Porter recently put together a brief presentation explaining the details. Check it out right here.

Source: DailyWealth

One Spot to Avoid in China's Stock Market Boom

 
I'm extremely bullish on Chinese stocks.
 
It's one of the best investment opportunities outside of the U.S. today. And the upside potential is massive.
 
Our team is so bullish that several of us just got back from a trip to China last month. We held two one-day conferences in Beijing and Hong Kong with leading experts in China's markets.
 
Our team is as bullish as ever after the recent visit… But today I'll issue a warning…
 
China isn't a "buy anything" market. While the overall opportunity is fantastic, a certain group of Chinese stocks is hitting multiyear lows. And it's a group you want to avoid right now.
 
Let me explain…
 
The first half of 2017 saw a major rally in Chinese markets… and I don't want you to worry too much.
 
I believe we are still in the early stages of a long-term bull market in China.
 
But not all Chinese stocks are good buys today. It's not a "buy anything" market.
 
Specifically, Chinese small caps have been losers in recent years. From early June 2015 to the end of 2016, Chinese small caps fell around 50%. And the downtrend has continued.
 
We can see this through the ChiNext Price Index, which holds a basket of local Chinese small-cap stocks. The index has fallen off a cliff… and continues to hit new lows. Take a look…
 
This is an ugly chart… The recent fall pushed the index to its lowest level since January 2015.
 
Chinese small caps are also dramatically underperforming the overall Chinese market today. While the Shanghai Composite Index is up 7% this year, Chinese small caps are down double digits. Take a look…
 
This chart teaches an important lesson… Not everything soars during a bull market. A rising tide doesn't necessarily lift all ships.
 
So yes, Chinese stocks in general are having a fantastic 2017. And yes, I'm still extremely bullish on China today. But no, this is NOT a "buy anything" market.
 
Chinese small caps are having a terrible year, despite a boom in China's larger companies.
 
Of course, Chinese large caps continue to soar. And I believe we are still in the early stages of a new bull market. Last month's trip to China only made our team more excited about the long-term opportunity.
 
Today, the simplest way to profit is to buy the companies that are soaring… China's largest companies. These are the Chinese stocks that are booming now. And as hundreds of billions of dollars start flowing into the Chinese stock market, nearly all of it will go into large caps – not small caps.
 
This is a major long-term opportunity. And I urge you to be a part of it now – by investing in China's largest, most successful companies.
 
Good investing,
 
Brett Eversole
 

Source: DailyWealth

The Easiest Way to Profit in the Real Estate Boom

 
The real estate boom is nowhere near done yet…
 
I know what you're thinking… "The housing market has already been booming for a while now. How much longer can it go on?"
 
A lot longer.
 
The reason is simple: There's no supply of houses. (It's hard to believe… but it's true.)
 
With no supply, and a ton of demand, home prices can only go one way – up.
 
Let me show you how much supply is lagging even after a few years of this boom… And then I'll share the easiest way to make money from this…
 
Total housing inventory has fallen year-over-year for 24 straight months, according to the National Association of Realtors.
 
Let's take a closer look at this idea and what it means for us today…
 
Here's a chart of the housing inventory – existing homes that are currently available for sale in the U.S.
 
As you can see, inventory hit a record low recently. Take a look…
 
I want you to notice something else on this chart… Inventory hit a record high in 2007 – at the peak in house prices.
 
The last time housing inventory was at a level similar to today's was in 2001. Back then, you wanted to be a BUYER of real estate, not a seller.
 
In short, you want to bet on house prices going higher when there's no inventory… And you want to bet on house prices going lower when inventory is at record highs.
 
Now let's quickly look at another number: new homes being built…
 
You'd think homebuilders would be taking advantage of the lack of inventory. You'd think they'd be building a ton of homes. But that's not quite what's happening yet…
 
After the big housing bust, builders stopped building homes. It has been nearly a decade, and the rate of building is still "below trend." Take a look…
 
Housing starts have increased dramatically from the bottom… But they're still below average. Building hasn't caught up with demand yet. And that has kept supply low.
 
Today, we have a small number of homes being built, and a record low inventory of homes for sale.
 
Based on that, I believe home prices will soar.
 
And if that happens, the big beneficiary will be homebuilders…
 
Homebuilding is a simple business. Buy land, then build and sell houses. It's highly profitable when housing booms. And I expect the current boom to continue from here.
 
The easiest way to play this trend is to buy shares of homebuilding companies. And the best one-click way to trade homebuilders is through the iShares U.S. Home Construction Fund (ITB).
 
ITB holds a basket of homebuilding companies. And I expect it will soar as the current housing boom continues. I urge you to check it out.
 
Good investing,
 
Steve
 

Source: DailyWealth

The Real Trouble With 'Bizarro Capitalism'

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 
 Today, a quick review of one of my new favorite themes: "Bizarro Capitalism"…
 
To preview the conclusions, you'll find below there's a hidden downside to global central banks' campaigns of endless credit expansion and zero interest rates: As capital costs disappear, so do profit margins.
 
Equity investors will surely cheer financial innovations that lead to rapid amounts of revenue growth. But bond investors – those dreary troglodytes – focus on cash flows.
 
Trouble is, despite wondrous new products, massive investments in research and development, capital expenses (like plants and equipment), share buybacks, and gigantic acquisitions… most of America's top companies aren't producing additional cash flows. But they are producing a lot of new debts.
 
How will this end? That's the question I (Porter) will attempt to answer today.
 
 Readers of a certain age may recall Bizarro Superman – the comic villain who was Superman's polar opposite…
 
(Truly refined readers will recall the Seinfeld episode "Bizarro Jerry," which adopted the same metaphor. Seinfeld's sometimes-girlfriend tells him she has picked a new man who is the polar opposite of him, "Bizarro Jerry.")
 
Bizarro Capitalism is my extension of these ideas. It means a system of exchange and property ownership where capital is free and therefore requires zero savings or profits to grow.
 
 In April, I explained the macroeconomic foundations of Bizarro Capitalism to Digest readers…
 
In theory, the costs of doing business are limited to capital and labor. Technology has greatly reduced the labor inputs for most businesses. With nearly free capital and greatly reduced labor inputs… the costs of producing a widget or providing a service have plummeted across our economy.
 
That sounds great, right? Lower costs should equal bigger profits. But of course, there's also competition. When everyone has access to unlimited capital… and technology limits the per-unit cost of labor… economic theory suggests there will be a race to zero. No one will be able to make a profit because there's no scarcity of capital, and therefore no ability to increase relative productivity.
 
And… what has happened?
 
The last several years have seen the rise of companies that are experts at exploiting technology to reduce labor costs. Free capital and zero per-unit marginal labor costs equals a whole new form of capitalism that's genuinely unlike anything the world has ever seen before.
 
These are companies with massive scale, massive sales growth… and virtually zero profits.

 As proof of these concepts, I pointed to Amazon (AMZN)…
 
Here was a company that had grown tremendously. Since 2013, the online-retail giant's revenues soared from $80 billion to $140 billion annually. Those are huge numbers.
 
And profits? There aren't any in its consumer businesses. Its corporate-services business (Amazon Web Services) makes about $1 billion a year currently.
 
So over the last three years, on revenues of $320 billion, Amazon made about $3 billion in profit – or less than 1% of sales. Nevertheless, it had invested an incredible $17 billion on acquisitions and capital improvements – before its $13 billion acquisition of Whole Foods Market (WFM). In total, the company has now spent $30 billion on investments in its business… almost none of which are expected to make a profit.
 
 The stock market loves Bizarro Capitalism…
 
Stocks in general have virtually never been this expensive before as measured by the ratio of share prices to revenues or profits. Bizarro leaders like Amazon and Netflix (NFLX) have seen their share prices explode.
 
When Amazon introduced the Kindle e-reader that gutted the profitability of every other book retailer, the stock was trading for around $90 per share. Roughly 10 years later, it trades for more than $1,000 per share – an increase of more than tenfold.
 
But Amazon wasn't just targeting book retailers. Even though online retailing today only makes up about 10% of retail sales, the price competition it has engendered makes it almost impossible to maintain a profit margin in the sector.
 
Finally, investors are beginning to realize the downside to Bizarro Capitalism. As you can see below, the retail sector looks like a war zone…
 
Company
Ticker
YTD Performance
Stage Stores
SSI
-60%
Tailored Brands
TLRD
-60%
Boot Barn
BOOT
-50%
Christopher & Banks
CBK
-46%
Express
EXPR
-43%
New York & Co.
NWY
-42%
Chico's FAS
CHS
-40%
Urban Outfitters
URBN
-38%
Foot Locker
FL
-30%
American Eagle Outfitters
AEO
-25%
Buckle
BKE
-25%
Finish Line
FINL
-25%
 This is just the beginning…
 
All these stocks, and many others, will likely go bankrupt. And the recovery rates on these bonds will not be normal (around $0.45 on the dollar) because no one is going to buy these companies or their assets beyond their inventories.
 
But the biggest problems from Bizarro Capitalism will occur in the commodity markets. Virtually free capital has led to a huge increase in commodity production, from oil to corn.
 
Since July 2011, U.S. onshore crude-oil production has essentially doubled. The last time U.S. crude-oil production doubled, it took 25 years, from World War II until the mid-1960s. We've done it again in just six years. Corn has seen a growth in production of almost 50% since 2012, from 10.8 billion bushels to 15.1 billion bushels.
 
 But what about consumption?
 
Since Bizarro Capitalism doesn't require anyone to delay consumption (for savings), there's no pent-up demand for any of this stuff. Oil and corn demand have barely grown.
 
That's why prices have fallen so much. Bizarro Capitalism is a recipe for collapsing profit margins (like retail). But it's also a recipe for collapsing commodity prices. And that sounds good… until you understand more about how Bizarro Capitalism really works.
 
You see, even though the money doesn't come from savings, it still has to be borrowed. And the folks who lent all of this capital don't think of it as funny money. They think it's real. And they're going to want it back, with interest.
 
 Back in April, I pointed to Deere & Co. (DE) as a primary beneficiary (in the short term) from Bizarro Capitalism…
 
The tractor manufacturer had lent farmers $38 billion to buy tractors and other items necessary for farming. (That explains the huge increase to corn production.)
 
The Wall Street Journal noticed this, too. This week, it published a well-researched article, noting that John Deere had become the fifth-largest agricultural lender in the country…
 
[Deere] is providing more short-term credit for crop supplies such as seeds, chemicals and fertilizer, making it the No. 5 agricultural lender behind banks Wells Fargo, Rabobank, Bank of the West and Bank of America, according to the American Bankers Association.
 Does that make any sense?
 
Should one of America's most important manufacturing companies be inflating the demand for its products by becoming one of the largest agricultural banks in the world? Isn't it obvious that these loans are going to lead to far too many tractors being sold, sharply lower corn prices, and eventually, a new financial crisis in America's heartland?
 
Deere, like many manufacturers in this credit cycle, has used leasing, even more than lending, to sustain demand for its products. Since 2010, the value of Deere's outstanding leased equipment has soared, from less than $2 billion to almost $6 billion. The Journal explained…
 
Deere accelerated its equipment leasing in 2014 when sales plummeted following almost a decade of rapid-fire purchases by farmers flush with cash. The leasing business has kept Deere from having to idle factories and has provided dealers with income from replacement parts and services for leased equipment.
 
[Leases] provided farmers with machines for one to three years for a fraction of their purchase price, alleviating the need for loans. A new tractor costing $250,000 can be leased for about $30,000 a year. That compares with the cost to buy with a loan, which would require a 20% down payment of $50,000 and more than $40,000 a year in payments for five years.

Trouble is, when you provide leases for equipment that make them much cheaper to own, you make it much harder to earn a profit selling the same equipment. Deere has seen its profit margins on its equipment sales fall from $5 billion to less than $2 billion.
 
That's Bizarro Capitalism: plenty of revenue, but no profit.
 
 Here's the real trouble…
 
Eventually, all of those leased tractors get returned. If they can't be sold quickly, Deere takes the loss. Over the last three years, the amount of equipment leased out by Deere is up 87%. But what have corn prices done? Nothing. So… what do you think will happen next, after three years of booming lease business and no profits from farming?
 
The stock market couldn't care less about these risks. Shares of Deere have moved from around $75 to more than $120 in roughly the last year alone. And right now, the bond market couldn't care less, either. Deere's long-dated bond (the 5.375% bonds due in 2029) is trading for $24 over par ($124) and yielding 3%.
 
 How will all of this end?
 
Will Deere successfully use virtually free money (in the form of endless supplies of credit) to prop up demand for its tractors forever? Will U.S. oil producers be able to lower their operating costs forever? (Recently, the average breakeven price for high-quality onshore production fell from around $50 to around $40, a change that has forestalled bankruptcy for a large number of U.S. oil producers.)
 
My bet is no. And like I first told Digest readers in April… sooner or later, the gigantic credit bubble that lies at the heart of Bizarro Capitalism will burst.
 
Of course, I can't give you a date to put on your calendar. But keep your eye on the market for high-yield debt. The credit market will see these problems coming long before the stock market does.
 
 In the meantime, the cost of "insuring" against these problems is near an all-time low…
 
Today, you can hedge your entire equity portfolio with a small number of long-dated put options trading at dirt-cheap prices.
 
But that won't be the case forever… When the stock market finally wakes up to these problems, it will be too late. Volatility will return – practically overnight – and put-option prices will soar hundreds or even thousands of percent as investors panic.
 
In other words, the best time to buy "hurricane insurance" is when the sun is still shining. And you have that chance today.
 
This is exactly what we've shown readers in our Stansberry's Big Trade service. But we've taken this strategy one step further.
 
We've identified the weakest, most troubled companies in the market today, a list we've dubbed the "Dirty Thirty." Each company on the list is heavily indebted and has serious flaws in its business model.
 
These firms are likely to struggle even if the bull market continues longer than we expect… And they're absolutely doomed when the credit cycle finally rolls over.
 
If you're not already reading Stansberry's Big Trade, I urge you to take a closer look today. Click here to learn more.
 
Regards,
 
Porter Stansberry
 
Editor's note: Porter is disgusted by what he's seeing in the markets today. That's why he put together an urgent warning to explain the steps you need to take to protect your portfolio from the coming bear market. Watch the brief presentation for free right here.

Source: DailyWealth

My Best Advice: Buy High (and Sell Higher)

 
For years, we have described the U.S. economy as "grinding higher." And many who earn their living by spinning doomsday scenarios have scoffed at us as we pitched our bullishness to all who would listen.
 
Even now, with optimism on the rise, some headlines persist in warning that the end is near…
 
But we take investing seriously, and we think you should, too. We base our decisions on what the facts are telling us, not on how we can cater to people's emotions.
 
That's why we're telling you something most folks don't know about the markets… Or if they know it, they don't want to believe it.
 
You see, buying at stock market highs tends to pay off. When the market posts higher numbers, it's not a sign of a top. It's usually a sign that the market will post higher numbers still…
 
When folks ask me for advice, my response for decades has been to quip: "Buy low and sell high." But one of the best ways to make money in the markets is to trade in almost the opposite way…
 
Buying stocks that are approaching 52-week highs often delivers better winners than other strategies.
 
What's more, new highs come in bunches…
 
We've analyzed the historical data… It turns out that if you buy the market when it hits new highs and hold for a month, you have a 91% chance of seeing it go up from there.
 
If you hold for three months, the chance of a new high rises to 97%. If you buy at market highs, your typical one-year return would be a healthy 7.9%. (All these numbers are based on the S&P 500 from 1928 to 2015.)
 
Rather than shy away from new highs, we need to realize that sometimes a great business is just that… a great business. And its rising share price is nothing to fear – it's an opportunity.
 
How can stocks near 52-week highs be undervalued? Why would investors make that error?
 
It has to do with a mental mistake people commonly make called "anchoring bias." Daniel Kahneman – the only psychologist to win a Nobel Prize in economics – first coined the term for this phenomenon. Here's an example of his idea…
 
When you provide an initial price or number to folks, their thinking gets skewed. They anchor to the old info.
 
Let's say you read two investment reports. One suggests shares of networking giant Cisco (CSCO) will rise 50% over the next 12 months, from $32 a share to $48. The other report puts the price target at $64, arguing the stock has 100% upside.
 
Investors who read the second report might hesitate to sell after Cisco rises 50%. Anchoring bias has left them feeling like the stock will climb another 50%. And if Cisco shares start to fall, anchoring bias can cause them to hold on to a losing investment.
 
It seems that humans gather any information we can as a guidepost and then base our decisions on it subconsciously.
 
This is what's at work in the 52-week-high anomaly. If a stock trading near its high announces good news, some traders will hear the news… but they won't bid up the stock as high as they might have if the stock had been lower. After all, this stock is already near its highs.
 
Not every trader does things that way. But enough of them do that it influences prices.
 
This means that stocks close to their 52-week highs don't get full credit for the quality of their businesses. And stocks near lows get too much credit because investors suspect that "they can't go any lower."
 
We're not going to suggest you go out and buy every stock that's near its highs. To begin with, we're talking about the highest-quality businesses.
 
But it's another reminder that we have to set aside our gut reactions and focus on facts. You have to set aside your emotional response to a high share price… and dig into the facts to figure out the company's real value.
 
We always start thinking about a stock by remembering it's a real business. If you buy great businesses at good prices, you'll win over the long term.
 
So don't get scared off by new highs. Stocks hit new highs because they are doing something right. If they keep doing those things, prices will keep rising.
 
Here's to our health, wealth, and a great retirement,
 
Dr. David Eifrig
 
Editor's note: Dave has singled out one sector that he believes is going to soar during the Trump administration… And he has told his readers about the five companies set to benefit the most from this major shift. These stocks are set to break out any day now. Get the details here.

Source: DailyWealth

Perception ≠ Reality in China

 
"You don't understand… Every major city in China looks like this," a friend – who has lived in China for decades – told us at dinner in Beijing last month.
 
All the Americans at the dinner table went quiet. A collective "oh… my… gosh…" went through our heads.
 
We were stunned – but we knew it was true…
 
We had just spent a couple days in and around Beijing. We were sitting at Din Tai Fung restaurant – according to the New York Times, it's one of the top 10 gourmet restaurants in the world. Food celebrity Anthony Bourdain said he'd "travel halfway 'round the world to eat dumplings at Din Tai Fung."
 
We'd walked 200 yards from our hotel to the restaurant – past Tesla car-charging stations, ultra-modern high-rises, and perfectly manicured streets.
 
Honestly, it felt like we'd stepped into the future. This was Communist China?
 
We'd already decided that Beijing was the most modern city any of us had ever experienced…
 
Where else can you buy a bottle of wine out of a vending machine… with just your mobile phone?
 
That's real. Payment via mobile phone is all this vending machine accepts. Cash and credit cards are no good.
 
This is the reality in Beijing. Life there is as futuristic as it gets.
 
Can all the major cities in China be even close to this?
 
Our dinner host – an American-born Chinese executive who has lived in China for decades – said yes. And I can personally confirm it's true of Shanghai and Shenzhen.
 
The thing is, the perception about China is different from the reality…
 
I'm fully aware of the criticisms of China… We get them in our inbox every day.
 
China's factories have "deplorable working conditions," a subscriber wrote to tell us recently. And he said that we were only taken to "places that we're allowed to see."
 
His views might represent the average American's views on China… But what is this, 1990?
 
I'm certain this subscriber has never been to China.
 
Saying that we were "only taken to places that we're allowed to see" is laughable. Nobody stopped me from going anywhere in Beijing… It's like being in a big city anywhere, but more modern. Being in Beijing feels like being in New York City. But cleaner. And safer. And more futuristic.
 
And the factories? Again, what is this, 1990?
 
Buying an apartment in Beijing will cost you more than $1 million today. It will cost you even more in Shanghai… and even more than that in Hong Kong. (These aren't fancy apartments with great views, either – the real estate is just that expensive.)
 
Think about it… With a cost of living like that, China can no longer possibly be the low-cost manufacturing hub of the world.
 
China's days of being the "sweatshop of the world" are over…
 
These massive differences between reality and perception are part of the reason I'm so bullish on Chinese stocks right now. They create a massive investing opportunity.
 
When the huge difference between reality and perception goes away, the potential for huge gains will disappear, too.
 
Said another way… when investors are excited about China, the end will be near.
 
That's not happening now. The general investing public is still dead wrong about China. And that means the upside potential is still great.
 
Good investing,
 
Steve
 
Editor's note: Steve has found a futuristic company with its hands on a new Internet breakthrough. Most people have never heard of it, and early investors will be rewarded as this firm soon becomes a household name. You can watch a rare three-minute clip of this app in action by clicking here.

Source: DailyWealth