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How to Be Cautious and Profit at the Same Time

By Justin Brill
Saturday, June 27, 2015

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 Legendary investor Jim Rogers is making headlines again. In an interview with financial news site MarketWatch, Rogers said he thinks we're "overdue" for a serious correction (or worse)...
In the United States, we have had economic slowdowns every four to seven years since the beginning of the Republic. It's now been six or seven years since our last stock market problem. We're overdue for another problem. The Fed might tell us we don't have to worry and that a correction or crash will never happen again. That's balderdash! When this artificial sea of liquidity ends, we're going to pay a terrible price. When the next economic problem occurs, it will be much worse because the debt is so much higher.

Rogers thinks the next serious correction is likely to be met with even more extreme measures by the Federal Reserve and other central banks, which will only distort markets further.
 Rogers noted that while he's not bullish on U.S. stocks, he definitely isn't shorting them yet, either. He says stocks could still "go higher than any rational person or irrational person can conceive" before a serious correction begins.
He did say if U.S. stocks were to fall significantly and if "Washington comes to the rescue," he would be tempted to buy. In the meantime, he thinks there are better opportunities elsewhere...
I see Japan still down 50% from its highs, China down 30%, and Russia the most hated market in the world, so I have bought all three in recent years and weeks. Why should I buy the U.S., which is wildly popular and expensive, when I can buy Russia, which is hated and cheap? There is nothing wrong with buying U.S. stocks if you know what you are doing. For me, it's easier to buy stocks cheap.

 When asked what advice he would give individual investors today, Rogers offered the following suggestions...
First, stick to investments you know and understand. If stocks turn down and you don't know what you own, you "will suffer badly."
He thinks all Americans should diversify some of their assets outside the U.S. as a form of insurance and hope they never need it. "If you do, you'll be glad to have it," he said.
If you know about farming or like the outdoors, Rogers suggests buying a little farmland...
Farmland always comes through... It doesn't mean you can't go bankrupt owning farms, because people can and do. But in the end, productive agricultural land always survives one way or another. I would urge people to think about this going forward.

Finally, Rogers suggests learning how to sell stocks short, noting there are likely to be "wonderful shorting opportunities in the next few years."
 At the other end of the spectrum, Jeremy Grantham – co-founder and chief strategist of famed money-management firm GMO – says it's still too early to be worried about U.S. stocks...
In a speech at the Morningstar Investment Conference in Chicago this week, Grantham said many stock valuation indicators are approaching "bubble land," but he's not getting bearish yet. "No bubble has ever broken until individuals pour money into the market," he said, noting that many investors pulled money out of the market following the financial crisis and are still avoiding stocks today.
Grantham also pointed out that the last round of Federal Reserve rate hikes from 2004 to 2006 didn't end the bull market in stocks.
While he believes the market is headed higher, he did admit it was becoming more difficult to find good places to invest today. Grantham said he thinks emerging markets are the "least awful" place to put your money right now.
 Many of these points will sound familiar to Stansberry Research readers...
Like Rogers, we've discussed how "easy money" policies from the Federal Reserve and other central banks are likely to end in disaster... But they could drive stocks much higher before that happens. And while we think U.S. stocks are likely to run higher, we've been pointing out the huge opportunities in places like Japan and China. We've also discussed the importance of diversifying some of your assets outside the U.S. and the benefits of alternative assets – like farmland.
And like Grantham, we've noted that despite record highs, many investors aren't interested in stocks, and shown why higher interest rates won't necessarily end the bull market in stocks.
 These views may appear contradictory, but we disagree...
We're cautious on the market today. While we always recommend avoiding (or selling) extremely overvalued assets, we recommend staying long today and "letting your winners run." (Of course, we also recommend keeping a close eye on your trailing stops, just in case.)
But we're also selectively putting new money to work in our highest-conviction ideas today, and some readers have questioned the move.
 Staying long is one matter... but if we believe we're in the "final innings" of this bull market, why do we continue to recommend stocks? Porter addressed this question in the May issue of his Investment Advisory...
Many people have challenged our writings recently... maybe you're one of them.
They've heard our warnings about the massive, unsustainable debt load our nation has accumulated... They've read our descriptions of the unimaginable volume of dollars the Federal Reserve has printed to cover our obligations and "inflate away" our debts... They've seen our interview with former congressman Ron Paul about the looming crisis... And they've heard us say we're as bearish as we've ever been.
So, they ask... how can we continue to recommend stocks? If we're staring down a currency crisis of historic proportions... how can we advise people to put their capital into the stock market?
The answer may surprise you: Unlike just about everyone else who is gravely concerned about the future of our country, we believe one of the best ways to protect yourself is to BUY stocks.

But as Porter explained, the key is to buy the right stocks...
Look at Hershey... we recommended buying the chocolate maker at what conventional wisdom would say was the worst time imaginable – in December 2007, right before the financial crisis. Even so, over the course of the next seven years, we earned more than 150% on our money so far.
This wasn't an accident. If you read the original December 2007 recommendation, you'll see why Hershey is a special kind of business: Hershey will make money for its shareholders no matter what happens with the stock market or its share price (in the short term).
We call these companies "capital efficient" because they're able to return a large amount of their profits to shareholders without requiring much capital to maintain their business.

Porter went on to explain what makes a company like Hershey such an incredible investment in times of crisis...
First, it makes a low-cost, high-margin product. Because almost every American can afford its product, Hershey is able to make outrageous profits selling its chocolate bars.
Most important, it's able to raise prices no matter what the economic environment. In the mid-2000s, gross margins (the amount of money Hershey makes upfront on each sale) were in the mid-30% range. Those margins grew during the financial crisis and have now reached a huge 45%.
For every dollar of candy that Hershey sells, it's keeping nearly half of that revenue in gross profit. Few businesses offer investors both low prices (high sales volume) and extremely rich gross margins. These businesses tend to be extremely resilient to economic downturns because they have the ability to raise prices without affecting demand for their products. They're like a "get out of jail free" card for investors during tough times.

In addition to being "recession proof," the company also treats shareholders extremely well...
The second thing that makes Hershey special is how well it's managed. The company's operating profit margin is nearly 20%. This is a critical threshold. Companies that are able to earn profit margins this wide will almost inevitably produce a ton of cash. What happens with that cash depends on the nature of the business and the quality of the company's management. In Hershey's case, over the last 10 years, it has returned $6.4 billion to investors via both share buybacks and cash dividends.
Remember that Hershey's market capitalization – the value of all of its outstanding shares – at the time of our recommendation was only around $10 billion. Thus, shareholders who bought 10 years ago have already received 64% of their initial investment in direct payments from Hershey's management.
With those kinds of cash returns and the recession-resistant nature of its business, it doesn't matter what happens to the company's share price in the short term.

 Speaking of "crisis," we end today's essay with an unusual warning from our friend Bill Bonner...
Longtime readers know Bill is the founder of our parent company, Agora, and was an early mentor to Porter. And like Porter, Bill is incredibly bearish today. But his biggest concern is not the stock market. It's something much more important...
Bill believes we could be headed for a systemic "shock" that almost no one expects. And he says it could have an incredible effect on our day-to-day lives...
You will suddenly be locked out of your bank account... unable to withdraw cash or deposit a check... your stocks will swing wildly out of control... your Social Security payments will pile up unopened on your kitchen table... no one will cash them...
And one by one every service you've come to depend on, from your bank to your grocery store to our Federal government... will shut down...

Bill admits this scenario sounds outrageous. But his research has convinced him it's not only possible, it's much more likely than even he would believe.
Still, he knew most folks would be skeptical... So he put together a new presentation detailing what he has discovered, and he is asking readers to take a look and make their own decision. You can decide for yourself right here.
Justin Brill

This Week's Winners
S&P 500 Symbol Change
Williams Company WMB +12.8%
ConAgra Foods CAG +12.1%
Zoetis ZTS +9.7%

Countries Symbol Change
South Africa EZA +4.8%
Italy EWI +3.0%
France EWQ +2.6%

Sectors Symbol Change
Homebuilding ITB +3.5%
Food PBJ +1.6%
Agribusiness MOO +0.9%

Commodities Change
Wheat +9.0%
Corn +5.2%
Coffee +3.6%
Date Range:6/18/2015 to 6/25/2015
This Week's Losers
S&P 500 Symbol Change
ADT ADT -8.8%
Macerich REIT MAC -7.8%
CenturyLink CTL -7.5%

Countries Symbol Change
Brazil EWZ -3.9%
Russia RSX -3.8%
Lat.America ILF -2.4%

Sectors Symbol Change
Gold Mining GDX -4.9%
Utilities XLU -3.9%
Real Estate IYR -3.6%

Commodities Change
Palladium -5.5%
Lean Hogs -4.3%
Tin -3.1%
Date Range:6/18/2015 to 6/25/2015
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