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Weekend Edition

Porter Stansberry: This will signal the end of the bull market
Saturday, May 24, 2014

 We're in the midst of a bull market...
 
U.S. stock prices are at all-time highs, emerging markets are rallying, and Treasury yields are heading lower. Still, nobody wants to believe it...
 
According to the American Association of Individual Investors, around 28% of investors are bullish today. For the sake of comparison, 60% were bullish before the tech bubble popped, and 50%-plus were bullish prior to the subprime-mortgage crisis.
 
 Some of the biggest and smartest investors in the world – like hedge-fund manager David Tepper – are getting "nervous."
 
Porter recently sounded another alarm... He advised readers to watch for a collapse in the corporate bond market (meaning higher yields). He wrote...
 
Big institutional investors constantly evaluate whether to own more stocks or more bonds. Much of their decision-making is driven by what they can earn in bonds. When corporate bonds offer relatively high yields (8%-10%) annually, a lot of big institutional investors will opt to sell stocks and buy bonds. Doing so allows them to "lock in" gains and earn relatively high returns on their capital, with much less risk.
 
That's why I don't anticipate a significant bear market in stocks until corporate bonds begin to fall in price. Remember, bond prices move in the opposite direction from their yields. So a big fall in bond prices would send yields soaring. And that would drive investors to shift capital from stocks to bonds.
 
What will eventually drive a move down in stock prices will be higher interest rates. That hasn't happened yet.

 With stocks and bonds hitting new highs, it's good to be cautious. But as any wise investor knows, these rallies can last a long time. As the old saying goes, "bull markets climb a wall of worry." And people are worried right now, especially institutional investors...
 
According to a recent survey by Bank of America Merrill Lynch, asset managers have the most cash they've had in two years.
 
"Walls of worry are everywhere," Robert Doll, chief equity strategist at Nuveen Asset Management told Bloomberg Radio last week. Doll, whose firm manages $118 billion, said, "This is the least believed bull market that I've ever seen. From here it's earnings, it's fundamentals, it's can the economy grow? And my guess is the answer to that question is yes."
 
 We're not advising you start throwing darts at a list of stocks because everything is marching higher. In fact, we urge caution here. It's a good time to shed risk from your portfolio and raise some cash. Hold on to quality... And let your winners run.
 
Several S&A analysts agree that we're definitely closer to the end of this bull market than we are to the beginning... But we have yet to see that "warm and fuzzy" feeling toward stocks that usually marks the top.
 
 In a recent interview with Phase 1 editor Frank Curzio on his S&A Investor Radio podcast, natural resource expert Rick Rule explained a simple philosophy for investing in commodities...
 
Rick said you look for commodities where the price is less than the cost of production. As long as the world needs that commodity to live, the price will have to go up eventually. The catch is... you can't know exactly when the price will increase...
 
Right now, Rick says water is one of the most undervalued commodities in the market. From the interview:
 
[T]he most mispriced commodity of all is water. We're seeing this played out with the current drought. People have the ability to buy holders of water... Public or private agricultural companies with in-place water rights are an example. And as a homeowner, you need to invest in water-conservation measures because your water bill will go up and your water allocation will go down. This is something that's going to happen. It's a "when" question, not an "if" question.

And remember... water is used for more than just agriculture and taking showers...
 
 The mining industry uses a huge amount of water to retrieve minerals from the ground...
 
Two years ago, Freeport-McMoRan, one of the world's largest copper miners, bought 280 acres of ranchland in the Arizona desert for $1.3 million... All Freeport wanted was the water rights.
 
As the mining companies move into more remote and arid land, their need for water increases.
 
 Moody's estimates mining companies spent $12 billion on water management – which includes pipelines and treatment facilities – in 2013. That's three times what they spent in 2009.
 
Just in the U.S., mining companies consume around 4 billion gallons of water a day – about the same as households. That compares with 18.2 billion gallons for industrial uses and 128 billion gallons for agriculture, according to the U.S. Geological Survey.
 
From the Wall Street Journal:
 
Around half the world's copper comes from a belt running from Utah to Chile under mountainous, dry areas, and costs for water are expanding. The Chilean parliament is considering forcing mining companies to build desalinization plants, which remove salt from ocean water, rather than use fresh ground and surface water for their operations. BHP Billiton Ltd... and its partners agreed to build a $3.43 billion desalinization plant for its massive copper mine in Chile's Atacama desert. Freeport[-McMoRan] in Chile recently completed a $315 million desalinization plant and pipeline. And in Peru, it is building a $340 million sewage treatment plant.

"Water is a critical issue in places like Northern Chile and Southern Peru, and here in New Mexico and Arizona," Freeport-McMoRan Chief Executive Officer Richard Adkerson told the Journal.
 
Also, as the big miners stretch for more production, the quality of the ore is lower... meaning it takes more water to unearth the same amount of minerals.
 
"If you extract 100,000 tons of raw copper with 0.2% instead of 2% grade copper, you need 10 times as much rock and 10 times as much water," Paul Gait, an analyst at the financial research firm Sanford C. Bernstein & Co., told the Journal. "Water is one of the biggest things mining companies have to worry about, and it's going to get worse."
 
 Rick is one of the headline speakers at our natural resource-focused Stansberry Society event in Dallas on May 31... He's going to discuss some of the best ways to profit from water and other mispriced commodities in the market today.
 
But Rick is only one of the brilliant resource minds speaking at the event... Texas oil billionaire T. Boone Pickens is our keynote speaker. He'll be discussing the energy landscape of the United States... and what the shale boom means for our future. We also have Porter Stansberry, S&A Resource Report editor Matt Badiali – and many more.
 
Almost 600 people have bought tickets to attend. It's too late to buy tickets for the event, but you can still watch the entire event live from your own home.
 
We've hired a world-class production team to film and live-stream every presentation... So, you can get all the same valuable information, great stock picks, and other "in the room" information as everyone else.
 
And if you sign up to stream our Dallas event, we'll also let you watch the other events we're hosting this year in Los Angeles and Nashville.
 
You can learn more about the natural resources conference and how you can access the event here...
 
Regards,
 
Sean Goldsmith




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