Today, we’re going to revisit yesterday’s subject – something so surprising and counterintuitive that almost no one expects it or is prepared for it. 

We’re talking about a sudden disappearance of dollars. 

For a brief time – perhaps three days… maybe three months – Americans will wonder what happened to their money. The greenback will become more precious than gold… perhaps even a matter of life and death. 

But we’ll come to that in a moment… 

First, a dear reader wrote to ask about our new “Trade of the Decade.” 

The trade in question is not based on any forecast. We simply take a look at what has gone up the most in the last 10 years and sell it (or “go short,” as they say on Wall Street). On the other side, we look for what has gone down the most and buy it. 

We let mean reversion do the rest… 

(In statistics, “mean reversion” describes the phenomenon whereby extreme variables – such as stock and bond prices – tend to move back toward their average over time.)

More Juice in Japan

At the beginning of this decade, the best trade we saw was to buy Japanese stocks, which had gone nowhere but down for the preceding 20 years, and to sell Japanese bonds, which had gone nowhere but up. 

The trade had a not-so-hidden logic, too. 

Japan was clearly borrowing itself into bankruptcy. At some point, people would realize that Japanese government debt was not worth what they had thought it was worth. They’d sell their Japanese government bonds (JGBs). 

But what would they do with the money? 

They would have to buy Japanese stocks. 

So, how are we doing so far? 

The Nikkei 225 – Japan’s equivalent of the Dow – has gone up from 10,654 to 18,703 points. In yen terms, that’s a gain of 75% since the start of 2010. 

JGBs, on the other hand, have not gone down as expected – yet. They’re still going up in price (with yields falling). The price of the 10-year JGB has risen from 139 to 147, in yen terms – or about 6%

That leaves us with a net gain of about 69% in yen terms. 

Not too bad. But if we are keeping score in dollars, we have to adjust for the drop in the yen. This takes our net dollar gain down to about 30% so far. (Remember, this is a trade of the decade; we still have another five years to go.) 

Still, we’re happy with that. And we’re going to be a lot happier when investors finally wake up and realize their JGBs are worthless. 

There’s still a lot of juice in this trade…. especially because Japanese stocks are still relatively inexpensive. 

As colleague Steve Sjuggerud put it in his new True Wealth Market Intelligence service, “The best value in developed markets this month is Japan.”

A 50% Drop…

Now, let’s return to the line of thinking we took up yesterday. 

We remind readers that we live in such a topsy-turvy financial world that it is hard to tell up from down and backward from forward. 

Central banks and central governments issue more and more debt. But the price of debt goes up… so that the yield on $2 trillion of developed-world sovereign debt is now negative! 

In other words, lenders pay borrowers to take their money. Go figure. 

Meanwhile, the world economy is slowing. US corporate profits are falling. And US stock prices are so high relative to the earnings they produce that it would take a miracle to give investors a decent rate of return over the next 10 years. 

Former Value Line equity analyst, and our go-to guy on stock market valuations, Stephen Jones tells us that the rate of US stock market gains is slowing. 

There aren’t many examples from the past, says Stephen, but they suggest that gains will go lower and lower, until they become negative: 

On October 3, when I last wrote the note, stocks were up 17.2% from one year earlier. Today, March 5, stocks are up 12.2% from a year earlier. 

Forecasts are always tough, and there is not a lot of precedence at these high valuation levels. But this slowdown appears likely to continue, and thus position us with 0% year-over-year returns sometime over the coming year. 

Again, precedents are few, but they have resulted in roughly 50% market declines. 

A Monetary Shock

Whether that 50% collapse happens next week or five years from now, we don’t know. 

But when it happens it is likely to set in motion an alarming series of events that will lead to a temporary, but violent, monetary shock… 

People will go to their banks to get cash. But the banks won’t have any cash. The ATMs will run dry. 

There will be a “run on the banks,” to use the old-fashioned term. People will line up, desperate to get cash. Not because they fear the bank will fail… but because they need cash to pay for the necessities. 

“Wait a minute,” says French colleague Simone Wapler (or words to that effect). 

“Governments are already trying to stop people from using cash. In France, transactions of more than €3,000 [$3,292] in cash are forbidden.” 

In the US, too, cash is suspect. 

Ask your bank for “too much” cash… and the bank is obliged to report you to the feds. And if the police stop you and find a lot of cash, they are likely to confiscate it. 

“You must be doing something illegal,” they’ll say. 

(In fact, the Justice Department recently revealed that US police departments seized more than $6 million from citizens in roadside stops in the recent fiscal year – despite not pursuing any criminal charges against their “suspects.” It’s all part of the Justice Department’s “Civil Asset Forfeiture” program.) 

So, what would cause cash to come back into style… suddenly and overwhelmingly? 

What would cause a panic into dollars? 

Stay tuned… 

Regards, 

Bill

Market Insight:

The “Buffett Indicator” Flashes a Warning

by Chris Hunter, Editor-in-Chief, Bonner & Partner

Take your pick of valuation ratios. They’re all at or near extremes. 

But today, let’s look at Warren Buffett’s favorite – the total value of the stock market relative to GDP. 

In 2001, Buffett told Fortune magazine that market cap to GDP was “probably the best single measure of where valuations stand at any given moment.” 

That’s bad news for investors. Because the US stock market is the most expensive it’s been relative to GDP in the last 100 years… bar an eight-month period in 1999 and 2000 at the peak of the dot-com boom. 

And you know what happened next… 

Add in the contraction in US corporate profits in 2015… and the picture becomes even bleaker. 

According to Bloomberg, profits for S&P 500 companies are expected to come in at 2.3% for 2015 versus 5% last year. 

So, what’s keeping this market afloat? 

One big tailwind for stocks, as we mentioned on Wednesday, is the record level of share buybacks. (Remember, when companies buy back their shares, they cancel them. This means each outstanding share represents a higher percentage of earnings, which makes them more valuable.) 

Bloomberg reports that the biggest source of funds going into the US stock market is companies buying their own shares. 

They’re outspending speculators and exchange-traded funds by a 6-to-1 margin.

Today a man who has been uncovering critical information for 25 years spoke with King World News about the frightening truth regarding what the elites are really up to.  This is a terrifying trip down the rabbit hole of internet censorship, theft of assets and the war against the truth. 

Stephen Quayle:  “There is no longer such a thing as a level playing field in international markets and truth in America is all but dead.  Rape, pillage and plunder is the new motto.  In the Wonderland of program trading, artificial intelligence and a rigged casino, playing in the elite’s sandbox is a no-win situation….

…continue reading the Stephen Quayle interview HERE

Biotech stocks are on a historic run.

Over the past three years, this sector outperformed the S&P 500 by 128%. In fact, biotech stocks outperformed almost every sector you can think of since 2012.

This outperformance was due to several factors

Right now, the Federal Drug Administration (FDA) is approving new drugs at the fastest pace in nearly two decades. 

That’s because we are seeing huge technological advances in areas like immunotherapy, life sciences and orphan drugs (which used to treat rare diseases).

What’s more, hundreds of billions of dollars in sales are vanishing from Big Pharma companies like Pfizer (PFE), Merck (MRK) and GlaxoSmithKline (GSK). 

That’s because patents on their best-selling drugs are expiring. 

This is forcing Big Pharma to invest (using the billions of dollars in cash on their balance sheets) into the biotech space in hopes of finding the next blockbuster drug. 

I’ve talked about these catalysts numerous times over the past three years as a reason to buy biotech stocks. However, valuations are out of control. 

In other words, many of these stocks are priced for perfection — as if their early stage drugs are already generating billions of dollars in sales.

If you followed my recommendation to buy into this sector, I suggest taking profits right now. 

Not only are valuations near historic highs, but the “smart money” is starting to increase their short positions in the sector. 

One of the best measures to track the biotech industry is through the iShares Nasdaq Biotechnology ETF (IBB). This fund tracks the largest biotech stocks and has nearly $7 billion of net assets. 

Its top holdings include Amgen (AMGN), Celgene (CELG), Biogen Idec (BIIB), Gilead Sciences (GILD), Illumina (ILMN) and Regeneron Pharmaceuticals (REGN).

This fund has been on a tear during the past three years. For example, if you had put $10,000 into IBB three years ago, you could be sitting on upward of $28,000 today. 

This is a huge return compared to the S&P 500.

To compare, if you had invested $10,000 into the large-cap index, you would only be sitting on $15,300 in gains in that same time frame.

The monster return we’ve seen in biotech stocks is both momentum- and fundamentals-based. 

From a technical level, these stocks have been in an uptrend for 36 months. Many biotech names reached multiple new highs during this incredible run.

On a fundamental level, cash has been pouring into biotech stocks. This cash has come from large-cap healthcare stocks. 

Large-cap healthcare stocks have lost hundreds of billions of dollars in revenue over the past few years as patents expired on some of their blockbuster drugs. (That is, drugs generating more than $1 billion in sales.)

Companies Look to Buy the Next Blockbuster

Companies like Pfizer, Merck and GlaxoSmithKline have a combined $58 billion in cash on their balance sheets. 

They’ve been using this cash to invest in biotech companies (through partnerships and direct investments) in hopes of finding the next blockbuster drug.

The FDA has also been a huge help to the industry. In 2014, the government agency approved 41 new drugs. 

This is the fastest pace of approvals in 18 years. 

It’s also the second-highest on record, topped by 53 drug approvals by the FDA in 1996.

Once a drug receives FDA approval, the company is allowed to sell its product to consumers. That means the company will begin to generate revenue and eventually profits. 

This is also great news for the company’s share price, since most biotech stocks experience quick pops following FDA approval.

It’s Getting Harder to Find 
Cheap Stocks in This Space

Another catalyst for the industry includes rapid advances in key areas of medicine. 

We’ve seen amazing technology over the past few years on immunotherapy (using your immune system to fight off diseases) … DNA sequencing (able to test and analyze DNA using simple cost-effective blood tests) … and orphan drugs (quicker FDA approvals on drugs to treat rare diseases).

These catalysts have contributed to one of the greatest stock runs in biotech history.

For example, the IBB biotech ETF is trading at 50 times earnings. That’s about three times higher than the S&P 500. 

Consider that the average stock in the S&P 500 trades at less than three times book value. Meanwhile IBB trades at nearly 10 times book value!

Investment giant Goldman Sachs (GS) points out that some of the biggest biotech names are approaching a 10-year valuation high based on their price-to-sales ratios. 

That’s just one of the reasons Goldman downgraded the sector from “Buy” to “Neutral” in January.

Goldman also highlights how Amgen, Celgene, Regeneron and Gilead have recently become some of the most heavily shorted stocks. (This is based on Goldman’s Hedge Fund Trend Monitor report.) 

In short, the smart money is betting these stocks will decline in the months ahead.

However, valuation should never be the sole purpose of shorting or selling out of a position. After all, expensive stocks can always get more expensive. 

Falling Drug Prices Pose 
A Big Threat to Biotech

However, another big catalyst that could threaten the biotech sector …

Last month, the Obama administration said it would seek authority to negotiate prices on high-cost drugs under Medicare. 

I’m sure most of you agree that market forces — not the government — should determine the price on drugs. 

In addition, the Republican-controlled Congress is against this measure — and most voted against this initiative in the past.

However, healthcare costs are out of control. 

Over the next year, Obama’s budget plan projects a 30% increase in drug benefits due to the rising cost of specialty drugs. 

This model of negotiating prices is a key reason why drugs are now as much as 60% cheaper in other countries.

In short, it’s difficult for a politician to go on record supporting higher drug prices for elders. We could see politicians find a middle ground and negotiate small price cuts. 

This step alone would be enough to push biotech stocks lower from these super-inflated levels.

During the past three years, biotech stocks have been on fire. There are plenty of tailwinds in the past that helped contribute to this historic run. 

However, biotech stocks are priced for perfection. Any negative news could result in a huge pullback in some of these names.

My suggestion is to take profits in the sector. The reward of owning these names at current high multiples does not justify the risk.

Good Investing,
Frank Curzio

Overview:

• Stocks are hitting new highs despite negative string of econ reports
• ECB QE begins this month, likely levitating stocks
• Improving junk bond market, yen-carry trade, and growing bank credit also lending support
• While markets are at new highs, bullish sentiment shows investors are getting complacent

The S&P 500 had its first monthly close above 2100 in February, the Dow closed over 18,000, and the NASDAQ currently rests a mere 3% below its 2000 bubble peak of 5132.52. Why is the stock market heading higher when incoming economic data is surprising to the downside? The Citigroup Economic Surprise Index (CESI) for various global regions shows data for the U.S. currently rests at the lowest levels seen in nearly three years while the European CESI is near a two-year high.

Source: Bloomberg

What is surprising is the resiliency of the U.S. market in the face of such a sharp decline in positive economic surprises. Declines of the current magnitude have often marked the big corrections we’ve seen during the bull market.

….continue for 9 more charts and the summary HERE 

I’m writing to you today from the 30th floor of the Hilton Chongqing in Chongqing, China — where I just arrived to kick off a two-week tour of China’s Silk Road 2.0 — the 21st century version of the ancient, 2000 year old Silk Road trading route that connected China to Europe and beyond.

You probably never hear of Chongqing. Yet it’s a city of 8 million people and the capital of the province, where nearly 34 million Chinese make their home.

Chongqing covers a large area crisscrossed by rivers and mountains. The Daba Mountains stand in the north, the Wu Mountains in the east, the Wuling Mountains in the southeast, and the Dalou Mountains in the south.

The province slopes down from north and south toward the Yangtze River. I’ll be here for a few days scouting opportunities for my subscribers to my Real Wealth Report.

From here, I’ll cruise down the Yangtze River to various spots along China’s entirely new Maritime Silk Route which will create a new trading route from China down to Indonesia.

And then, I’ll be off to Xian and Lanzhou, two more cities along China’s new Silk Road — all in the name of finding my subscribers the many new opportunities here for enormous wealth creation …

In what is rapidly becoming the biggest infrastructure build out in the history of civilization. A nearly trillion dollar project that is unprecedented in scope and size.

Don’t worry, if you are not a subscriber to Real Wealth Report, you’ll still be able to follow my travels and learn of the luscious profit opportunities. I’ll make sure of it.

Also, don’t worry: Though I’ll be traveling through some pretty remote places in China via water and rail, I have full access to the Internet to monitor the markets, speaking of which …

The U.S. Dollar Remains in a Raging New Bull Market

Sure, there will be some setbacks along the way for the dollar. But the recent rally in the greenback — a whopping nine-month 20.9 percent gain in the Dollar Index, a basket of six currencies including the euro, the Japanese yen, the pound, Swiss franc, Canadian dollar and Swedish krona — is merely just the beginning phase of the dollar’s new bull market.

There are several reasons the dollar is strong. I’ve covered most of them in various columns and in even more detail in my Real Wealth Report.

For now, simply know this: All the pundits out there calling for the death of the dollar and hyperinflation in the United States are dead wrong!

They simply don’t understand the global economy. They don’t understand that the trillions of dollars printed by the Federal Reserve mostly went to foreign investors, who in turn, used those dollars to borrow still more dollars.

They don’t understand that private sector dollar-denominated loans around the globe are now as high as $3 trillion, meaning not only that the world is awash in dollars, but the constant creating of new dollar loans as well as the rolling over and paying off of older dollar loans means dollar demand is also soaring.

And they don’t understand that the fiscal and monetary measures being taken by the leaders of Europe are also dollar bullish, euro bearish.

What’s worse is that they can’t see the writing on the wall: The leaders of Europe and Washington are both waging tax witch hunts on their citizens, actions that are also dollar bullish …

As Europeans seek shelter outside their own country …

And Washington wages a witch hunt on every American citizen, myself included, who has money overseas.

All this is dollar bullish and it will remain so for many months to come. It will only end, unfortunately, when the dollar becomes so strong — and deflation in the U.S. so bad —

That the Treasury and the Federal Reserve both begin to aggressively devalue the U.S. dollar once again.

That’s many moons away. For now and for the foreseeable future, you can expect …

FIRST, more downside pressure on the euro. In fact, as I pen this issue from my hotel room in Chongqing, the euro is approaching a new low, the Dollar Index a new high.

SECOND, a continued bear market in commodities. Yes, there will be some short-covering rallies now and then, in the precious metals, in the energy markets, in grain markets and more.

But overall, the commodity sector, precisely as I have been forecasting, remains in a bear market that has not ended …

And will not end until we see rivers of blood in the streets in all commodity sectors … including fresh new lows in virtually all commodities.

For now, stay safe and stay tuned …

Best wishes,

Larry

– See more at: http://www.swingtradingdaily.com/2015/03/04/larry-here-reporting-from-china-on-silk-road-2-0/#sthash.Iq6yFiDE.dpuf