Porter Stansberry: Bumpy Road Ahead - Go for Blue Chips
Source: Karen Roche of
Steady tailwinds benefited the stock market for most of 2010,
but Stansberry & Associates Investment Research Founder
Porter Stansberry is bracing himself and his clients for a bumpy
ride for equities in the new year, as well as unprecedented
instability in muni bonds and Treasuries. In this exclusive
The Gold Report
, Porter, who's been predicting the dire consequences of
unbridled borrowing and continued quantitative easing for some
time, recommends utmost caution and conservatism for investors in
The Gold Report:
Much has happened since our last
in September. The election, with the Republicans taking the House
and the super majority in the Senate. QE2 (quantitative easing)
not only discussed but actually released. The U.S. assisting in
the financing in Europe. The benefactors of the 2008 bailout
money finally published. And then the hottest topic in Washington
for a while, extending the Bush tax credits along with an Obama
unemployment tax credit. Have any of these developments changed
or firmed your opinion of the U.S. economy or the international
I'm fascinated by the way the crisis is unfolding. The U.S.
government is still willing to add enormous amounts of new debt.
And it is willing to underwrite not only quantitative easing in
the U.S. but also fund it in Europe as well. These are symptoms
of a much bigger ongoing problem-the enormous sovereign debt
crisis in the Western democracies.
I think we're going to see a lot more quantitative easing.
We're going to have to see a lot more fiscal deficit growth going
forward, especially with a union between the Republican House
that wants to cut taxes and the Obama administration that wants
to extend benefits. "You let us cut taxes and we'll agree to
extend benefits." Of course, that's the worst of both worlds in
terms of our fiscal position because it will result in vastly
bigger spending and less tax revenue. There's no other government
that will even attempt adding vast new debts at this stage in the
game. Americans still have no idea of the risks our government is
taking with our currency.
The international quantitative easing you mentioned was in
Europe. Is it only the Western countries that concern you and not
There's been a dichotomy in the world financial markets over the
last 30 years between the developed markets and the developing
markets. Brazil, for example, always had to pay a lot more in
interest to borrow money than governments in developed nations.
We're seeing a whole new kind of order in the markets. Think of
countries that simply run sound fiscal policies-such as Canada,
Switzerland, Singapore and Hong Kong. You can probably throw a
couple more in there now, such as Brazil.
In places with current account balances or surpluses, the
currencies continue to strengthen versus the U.S. dollar. Bond
yields continue to decline versus the U.S. dollar. Meanwhile,
places that used to be considered safe, such as France, the U.K.
and the U.S., are seeing bond yields go higher and currencies go
lower. This is a new bifurcation in the world markets that's
completely related to the ongoing policy decisions of these major
Western countries, where governments have always had easy access
to credit markets. There is a belief, at least on the part of the
American people, that they can borrow money forever without
consequence. I'm sure you'll recall the famous Dick Cheney remark
that deficits don't matter.
I believe we are at the end of the line of those policies. And
that's why we've had to begin to fund our fiscal deficits with
just printing paper. That's what quantitative easing is. I think
we're at a real crisis point, where for the first time ever
America's creditors are beginning to abandon the dollar. You see
that in two ways. Number one, for the first time since the early
1970s, central banks are now net buyers of gold again. Number two
is the huge move down in the bond market that you've seen just
really recently since the last round of quantitative easing began
in the U.S. This is a really big change.
And an important one.
It certainly is, and right now we have a situation where the muni
bond market in the U.S. is crashing. Muni bonds are falling 2% or
3% every week. These bonds shouldn't decline at all. People have
long thought of the muni bond market as the safest place in the
bond market for retirees' money. Well, now it's in freefall.
Normally, if you took money out of the muni bond market, you'd
put it in the Treasury bond market. That's the only thing that's
even safer. But both markets now are in decline. People are
selling both muni bonds and Treasury bonds at the same time.
That's a sign of a major problem in the fixed income markets.
And, because the U.S. bond markets are the largest securities
markets in the world, that means we're in the midst of a major,
major financial crisis. I don't really think people realize it
Are you referring to the general population?
When I talk to people, when I talk to news commentators, when I
do interviews, when I talk to investors, when I go to investment
conferences, when I talk to very well-known hedge fund managers.
. .all of these people have some idea that things are going
wrong. Lots of them say they're worried about being on the verge
of a big crisis. I think we're in one. So, I ask them,
rhetorically, what do they have to see in the markets before they
realize the crisis is underway?
How high does the price of gold have to go? How far do
Treasury bonds and muni bonds have to fall? How far does the
dollar have to decline on a trade-weighted basis? How high does
unemployment have to go? How big do the fiscal deficits have to
grow? They don't have any answers to those questions because all
of the thresholds have been violated already. Two years ago, no
one would've thought it possible for the muni bond market and the
Treasury bond market to both fall as much as they have fallen in
the last six weeks at the same time. That just didn't happen ever
So if we've passed all those thresholds, why doesn't the general
media say we're in a crisis?
Even though the currency markets and the bond markets are vastly
larger, the stock market hasn't cracked open yet, and for
whatever reason, the major media focus is almost entirely on the
stock market. Until stocks fall 20% or so, the media won't panic.
But God help you if you're still long on stocks when the nightly
news begins to feature the core financial problems we face.
You've been advising people to get into so-called "real asset
classes" such as agriculture, gold, silver, various forms of
energy. But won't all stocks be worthless in an economic
catastrophe and global hyperinflation?
Stocks actually can be a very good hedge against inflation, and
short of hyperinflation, stocks will have the ability to increase
their dividends to match the rise in prices. Now I say short of
hyperinflation; if we get to real hyperinflation all that's off
the table and you're exactly right.
So what we're doing now is buying what we think are the best
hedges against inflation-energy, agriculture and hard
money-silver and gold bullion. We're also selling short lots of
stocks that are overly in debt or are obsolete, such as
newspapers or hard drive companies. Earlier this year, I told
people that if they aren't willing to short stocks to hedge their
portfolios they should only be in cash and gold, and they
shouldn't own any stocks.
You said investors who aren't willing to short stocks should stay
in cash and gold. But cash value is getting inflated away with
quantitative easing. Why put anything in cash if it won't
appreciate? Why not put it all in gold?
When you're dealing with a bankrupt sovereign- like the U.S.
government-you're dealing with a very powerful wounded bear. You
have to be very careful because you can't know what the beast is
going to do. You have to balance against both the risks of the
ongoing inflation and the risks of a government reaction to the
falling value of the dollar. If you put 50% of your portfolio in
very short-term Treasury bonds, like one-year Treasury bonds, and
the other 50% in gold, you've really set up a perfectly hedged
position. You've gone to a very liquid position where you could
hold on to what you've got safely. If the dollar falls, you're
protected. If the government acts to reduce the price of gold,
you're hedged. No matter what happens, you'll have liquidity and
there's very little chance of losing purchasing power.
But if it's perfectly hedged, doesn't one offset the other and
you have not then increased wealth?
True, you're just treading water. But in periods of a crisis just
treading water is actually a very good return. It's easy to say,
"Oh, I'll just go all to gold." But the government can't allow
gold prices to continue to escalate without losing credibility
for their paper, so what if the government decides to shake up
the gold market? What if they do something to influence the price
of gold negatively in a very severe way? I'm not saying they
would confiscate all the gold, although they could. They could
change margin requirements or launch an investigation of the gold
ETF. They could do all kinds of things to undermine the gold
market that could send gold prices down 20% or 30% in the short
term. If that happened and you had all of your savings in gold it
would be extremely uncomfortable. In the meantime, if you were
long 50% dollars and 50% gold you still would have made more than
10% this year. So you're actually doing just fine. You're just
doing so in a way that recognizes we're in a very dangerous and
unstable period of time.
In our last conversation, you recommended-at least for
2010-buying the highest-quality blue-chip companies in America
that had good global businesses that are really cheap. You gave a
couple of examples, Wal-Mart Stores Inc. (
), Johnson & Johnson (
), Intel Corporation (
) and Microsoft Corporation (
). You pointed out they were paying increasing dividends, in
fact, at a higher rate than clipping the coupons for these
particular companies. Will that continue to be a good strategy
Yes. I strongly endorse that strategy. High-quality blue-chip
international businesses are very cheap right now. Their global
earnings offer a lot of protection against a dollar decline.
Intel makes something like 75% of its sales outside the U.S.
dollar. That's global protection via a very high-quality business
that has a fantastic protective moat, has very high margins and
has a shareholder-friendly board and a business model.
But while you can use equities to hedge against the risk of
inflation, unfortunately you can't use them to hedge against the
risk of a hyperinflation. That's why I've also been urging people
to buy silver and gold bullion and to be willing to hedge their
long exposure by shorting some very low-quality stocks.
To summarize where we've been-we're looking at having bullion,
blue chips and a short portfolio. Earlier in our conversation we
were talking about such investment hedges as agriculture and
energy. Where do those fit into what we've just discussed?
When it comes to energy stocks, we like very high-quality
integrated blue chips. We like stocks that are involved in the
Eagle Ford discovery in south Texas. And we like what are
essentially royalty companies, companies that get paid to extract
the hydrocarbons from their property, like
San Juan Basin Royalty Trust (
When it comes to agricultural stocks, we've written a lot
about Monsanto (MON), which I know is a controversial business
but I think is a very good long-term bet. Having talked to global
food company CEOs recently, I'm convinced that Monsanto's seeds
are the only way to significantly increase agricultural
production globally. That has to happen to keep pace with rising
populations. You can also look at a company such as Cresud Inc.
(CRESY), which is managed by one of our friends, Eduardo
Elsztain, and is a very good business in South America that owns
huge soybean farms. There are all kind of different ways to get
exposed to agriculture but those are some of the ideas that I
think would be good for investors to consider.
You've mentioned that agriculture is one of the most important
inflation hedges primarily because we all need to eat food.
Hard money is the most important inflation hedge, something like
gold and silver, for the simple reason that if you own plenty of
gold and silver you can buy any other commodities you need
because you own real money. Then energy comes in behind
agriculture because you have to eat before you drive your car
In terms of increasing productivity, the big problem for
agriculture has been the rise of various political movements that
oppose expanding farmland. Other political problems go to various
subsidies and regulations. For example, in Europe not only are
farmers prohibited from using Monsanto genetically modified
organism (GMO) seeds, which makes it very difficult to increase
crop yield, but the governments continue to pay farmers not to
plant. The United States government also pays farmers not to
plant certain crops. All kinds of political incentives against
increasing production don't make much sense but they exist.
Some food CEOs are very concerned that as global inflation
accelerates, there's a big risk of a trade war and a currency
war. They're really afraid that some of the people in the poorer
countries will begin to starve.
When we last spoke you said that you were still trying to survive
2010 and weren't prepared to talk about your expectations of 2011
because we weren't there yet. Well, we're almost there now. How
well did you survive 2010? And can you make any predictions for
I don't have the final tally on all of our results but I know
we've done very well. Through early December the average profit
on the nine stocks we recommended buying during 2010 was 7.5%,
led by a 42% gain in San Juan Basin Royalty Trust. Don't forget
these recommendations were all super-safe, blue-chip stocks. Our
single-digit average return was very much on purpose. We didn't
feel comfortable on the long side of the market in 2010.
Meanwhile, the average profit on our six recommended short sells
was 17.5%, led by a 51% gain shorting Seagate, a hard drive maker
we think is going to zero.
Two things to remember about these results. First, they're
just plain averages. Lots of newsletter editors will annualize
their results to account for the fact that the model portfolio
isn't fully invested all year, as recommendations go out monthly.
We don't do that because you can't "eat" annualized results.
Second, these results don't include any of our hard money
recommendations. Buying gold and silver would have added
significantly to your gains this year-as we predicted. Gold is up
27% this year. Silver is up 75%.
As you know, it's one thing to pick stocks and it's another
thing to actually make money in the markets. Our primary goal is
to help real people make real money. Our portfolio is designed to
make double-digit annual returns, no matter what happens in the
markets. Including our bullion allocation, I'd estimate that a
reader would have earned more than 15% last year on their whole
portfolio, even though the portfolio would have been completely
hedged the entire year, and would have had a very large cash
position for the first six months. Those are world-class
risk-adjusted returns and I'm very proud of how we've done.
Unfortunately, I believe it's going to be tougher to make
money 2011. I expect the government to strike back. I don't think
they're going to let commodity prices continue to soar. I'm very
concerned about the repercussions of that on investors. So if I
was very conservative in 2010 I've become downright scared in
2011. I don't yet know how we're going to hide, but I can tell
you it's going to be a very large combination of hedges. We're
going to have to continue to be very, very conservative in our
allocations and make sure that we're prepared for any potential
I really do think we'll have a huge correction, particularly
in the silver market. I'm a major silver bull, and I believe
silver is inherently worth $120 an ounce already and it's going
higher. But markets just don't go straight up the way silver has
in the last couple of months. So I'm concerned that my
subscribers may think that we can buy agriculture and energy with
impunity and that we can buy as much silver and leverage it as
much as we want without getting destroyed by the market
volatility, just because we're in the middle of an inflationary
crisis. I think we're going to see some of that volatility next
year. I don't have a crystal ball, but it seems as if there needs
to be a shakeout in the market because the investors have gotten
so bullish on these ideas about sound money and energy and
You expect it to be tougher to make money 2011 because the
government will strike back. What tools do they have to strike
back at investors?
They have all the tools in the world. They could do all kinds of
things. They could pass huge new withholding taxes on any kind of
investment in bullion, for example. They could change the rules
on the commodity exchanges. They could make rules about prices
and windfall profit taxes. There's any number of things they can
do to distort the markets and punish speculators, and there's no
doubt in my mind that they will do some of them. There's no doubt
in my mind that at some point next year Obama is going to come
out, point the finger at the camera and say, "An international
group of speculators is destroying our bond markets. We're going
to stop them."
I'm expecting some big volatility next year. You have to be
willing to be careful with the size of the positions that you're
putting on and with your expectations about volatility. Things
are going to get really volatile.
Does that mean investors need to be more fluid in and out of the
market? Not day trading, but more actively trading in and
My recommendation is just to be more conservative. Hold larger
cash positions than you otherwise might. When you do go to buy a
security or take a position in a commodity, make sure the price
seems relatively good. It's very difficult to do that when it
comes to commodities because it's impossible to determine a real
true intrinsic value. I mean, what's gold really worth? It's an
But I would just use common sense. Silver, for example, has
gone from let's say $15 an ounce to almost $30 an ounce just in
the last six months. Buying a commodity after it's doubled in six
months is probably not such a good idea. The same goes for buying
a stock such as
Tesla Motors, Inc. (TSLA)
. This electric sports car company has borrowed a tremendous
amount of money and can't possibly make a profit, so it's
probably not a good idea for next year-unless you're shorting
As interest rates go up, as the U.S. bond market begins to
look a little more attractive to investors, the long bond might
break through the 6% barrier next year. That would have a huge
impact on equity valuation because if you have theoretically a
risk-free rate of 6%, oh man, equities are going to be worth a
lot less than people think they are.
Theoretical is the operative word there.
Of course. It's not at all risk-free. In fact, it's a guaranteed
way to lose money because the inflation rate is certain to exceed
6% next year, but my point is, if yields on government bonds keep
backing up, then at some point it's going to impact equity
valuations, which are already far too high. And that means, at
some point in 2011 we're going to see a big correction in stock
Porter, in closing, are there any other insights you'd like to
provide to our readers?
Just the same thing that I've been saying for a long time. We're
in the midst of a crisis and this is a time to be unbelievably
conservative with your investments. You can't assume that
anything is safe anymore. People have been hiding their savings
in muni bonds. They're going to get wiped out next year. People
who have been hiding their savings in Treasury bonds are getting
wiped out right now. People have been thinking that they can put
an unlimited amount of money long in gold and silver and that
they're only going to make money. That's not going to happen next
year. There's going to be some volatility. So I would urge people
to take some profits early, to keep some money in cash and to
just simply be very conservative. If you have two investment
choices, one of which is speculative and one of which is
conservative, go with the conservative one. It's going to be a
tough year in the markets.
Want to learn more about Stansberry & Associates
Investment Research? Watch
. The first American editor of the Fleet Street Letter, the
oldest English-language financial newsletter, Porter Stansberry
put out his shingle at Stansberry & Associates Investment
Research, a private publishing company, 11 years ago. S&A
now has subscribers in more than 130 countries. S&A's
60-plus research analysts, investment experts and assistants,
working at company headquarters in Baltimore, Maryland, as well
as satellite offices in Florida, Oregon and California, came to
S&A from positions as stockbrokers, professional traders,
mutual fund executives, hedge fund managers and equity analysts
at some of the most influential money-management and financial
firms in the world. Porter and his team cover the gamut from
value investing to insider trading to short selling, all based
on exhaustive amounts of real world, independent research.
Porter Stansberry's Investment Advisory
, Porter's monthly newsletter, deals with safe value
investments poised to give subscribers years of exceptional
Porter Stansberry's Put Strategy Report
, his weekly trading service, shows readers the smartest ways
to book big gains during the ongoing financial crisis.
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1) Karen Roche of The Gold Report conducted this interview. She
personally and/or her family own shares of the following
companies mentioned in this interview: None.
2) The following companies mentioned in the interview are
sponsors of The Gold Report: None.
3) Porter Stansberry: I personally and/or my family own shares of
the following companies mentioned in this interview: None. I
personally and/or my family am paid by the following companies
mentioned in this interview: None. (Stansberry Research does not
permit its analysts to own any of the securities that they
personally recommend to its subscribers.)
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