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Get Ready for the Greatest Trade in History

small cap stock winners with sid riggs

In Wall Street lore, it's known as the "Greatest Trade Ever." It's also known as "The Big Short."

In 2006, John Paulson was a relatively unknown hedge-fund manager, just another face in the crowd.

But Paulson was smart, observant - and had the courage of his convictions. He understood something that most others didn't even suspect...

The U.S. housing boom was a sham - especially in the area of "subprime" mortgages.

Paulson was schooled in mergers and acquisitions (M&A), so mortgages weren't at all his bailiwick.

But he believed the mortgage market was poised for a free fall. He wanted to make a big bet against this market - a "big short."

He just wasn't sure how to make that wager...

Paulson and several other renegade investors like Michael Burry and Jeffrey Greene made big bets against the risky mortgages using complex financial instruments known as "credit default swaps," or CDS.

Initially, the trade went against these mortgage doomsayers - putting them tens of millions of dollars in the red as the mortgage market continued to rocket. But instead of closing the trades and accepting the losses, Paulson and these few others effectively doubled down.

By the middle of 2007, the credit markets stumbled and then careened downward.

As the year came to a close, it was clear that Paulson had pulled off "The Greatest Trade Ever," having earned $15 billion for his firm - a total that dwarfed investing icon George Soros's billion-dollar currency play of 1992.

Over time, the Paulson trade gained a second moniker - one besides "The Greatest Trade Ever."

Thanks to a best-selling book about the mortgage crisis that was written by Michael Lewis, the Paulson trade became known as "The Big Short."

I'm telling you this story for a reason. An even "Bigger Short" may be on the horizon, and I'll tell you how to profit from it...

The "Unnatural Disaster" Ravaging Global Markets


The tide is turning for crude oil prices. Following some nice recent gains and despite a dip on Tuesday, the market currently remains at just below $60 a barrel for West Texas Intermediate (WTI) crude oil futures in New York. The recent rise in prices would seem to be just what the smaller operators in the U.S. need to avoid a sector meltdown. A few months back, when prices were pushing lows of $40 a barrel, there was widespread talk of a wave of bankruptcies coming in the oil patch. The picture is now better, given a recovery in crude prices.

The tide is turning for crude oil prices.

Following some nice recent gains and despite a dip on Tuesday, the market currently remains at just below $60 a barrel for West Texas Intermediate (WTI) crude oil futures in New York.

The recent rise in prices would seem to be just what the smaller operators in the U.S. need to avoid a sector meltdown.

A few months back, when prices were pushing lows of $40 a barrel, there was widespread talk of a wave of bankruptcies coming in the oil patch. The picture is now better, given a recovery in crude prices.

But there is another shoe about to fall in the ongoing fight by smaller companies to survive. Here's my take on the disaster that's brewing - and the opportunities it may bring...

Warning: High-Risk "Junk" Bond Squeeze Headed for Oil Market

junk bond

High-risk junk bonds finance large portions of the energy markets. According to the latest estimates, energy-related issuances now account for almost 15% of the total $1.4 trillion junk-bond market.

That's about $210 billion in high-risk debt.

But recent credit rating downgrades could put oil companies and bond investors in a squeeze...

Why the U.S. Treasury Market Is No Longer Safe

US Treasury market

The U.S. Treasury market is worth more than $12 trillion. It's believed to be the safest market in the world. Whenever there's a panic and the markets freak out, investors dump stocks and buy Treasuries. That's the so-called "flight to quality."

However, back on Oct. 15, when the last flight to quality exploded, the U.S. Treasury market failed to do what it had always done.

It failed to be safe - and nobody's talking about it...

Can the Dow Jones Today Recoup 17,000? Here's Friday's Top Stock Market News

Dow Jones Today

Stock market news today, July 11, 2014: The Dow Jones today (Friday) will open just 85 points under 17,000 - a level it was able to achieve late last week, but has since slipped back under.

Yesterday, U.S. markets ended in red across the board on news that Portugal's Banco Espirito Santo had its top shareholder halt the sale of the bank's stocks and bonds. At its worst, the Dow Jones was down 180 points intraday, while the Chicago Board Options Exchange Volatility Index (VIX), typically known as the Fear Index, jumped more than 5%.

Here’s a roundup of the top stock market news stories for Friday…

What Are High-Yield Stocks?

high-yield stocks

With interest rates at an all-time low, high-yield stocks have replaced bonds as the best option to provide a stream of income in a portfolio. What's more, they deliver the added perk of equity ownership for potential growth.

Here we explain what high-yield stocks are and give readers a few examples to get them started today...

The Painful Price of Subsidized Money

Since the 1980s, the bond markets have financed a long run of spending beyond our means. That's about to change.
And when it does, bonds will become Darth Vader's Death Star, capable of destroying the world economy with a single beam. And it's most unlikely that the current global economic brain trust will find their secret vulnerability...if they have one.
But there is one investment that will survive...

Should You Be Worried About a Bond Market Crash?

Talk of a bond market crash has been building for months, and not just among obscure financial bloggers.

Articles sounding the alarm about a bond market crash have appeared time and again in many mainstream publications.

Recent headlines like "Danger Lurks Inside the Bond Boom" (The Wall Street Journal), "How Banks Could Get Blown Away by Bond Bubble" (Fortune), and "Beware the Bond Bubble in 2013" (CNNMoney) have raised concern among investors.

Here's the problem: Interest rates are at historic lows. That makes bond prices relatively high.

There's pretty much nowhere left for rates to go but up. That might be good for buyers of bonds in the future, but terrible for those who hold bonds stuck at low rates.

To continue reading, please click here…

2013 Bond Market Forecast: Is the Bond Bubble Finally About to Burst?

The Federal Reserve's multi-year prescription of targeting super-low interest rates on federal funds, along with various quantitative easing programs, has pushed yields down on all fixed-income instruments to the benefit of issuers and the detriment of investors.

There is little doubt that the Fed's articulated and executed policies have resulted in a bond-bubble with both short and long-term consequences for investors and the economy.

At some point the bond-bubble will burst. But there is no certainty on when that will happen or what ultimately will cause rates to rise.

What investors need to understand is that while yields and bond prices in 2013 could remain flat relative to closing third quarter 2012 measures, yields are unlikely to fall further and prices are unlikely to rally in 2013, with the possible exception of short-term U.S. treasuries.

However, there is the possibility of what I'm calling a "skyfall."

For fixed-income investors this means there is a chance the bond bubble may finally burst.

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Jim Rogers: Market Surge from Eurozone Debt Crisis Deal Won't Last

Stock markets around the world soared Friday in reaction to the morning's Eurozone debt crisis deal, but noted investor Jim Rogers wasn't impressed.

"This is no more than just another temporary stopgap to make the market feel good for a few hours, days or even weeks," Rogers, Chairman of Rogers Holdings, told CNBC. "Then everybody's going to wake up and say, "This doesn't solve the problem.'"

Meeting in Brussels, European leaders announced a plan early Friday that would provide struggling banks with money directly from the bloc's bailout fund.

The leaders also said bailout funds could be used to stabilize European bond markets. But they did not tie such use to additional austerity measures, which have angered citizens in debt-troubled nations like Greece and Spain.

The summit is just the latest in a series of high-level attempts to resolve the 2-year-old Eurozone debt crisis, which has required bailouts of Greece, Portugal, Ireland, and most recently the Spanish banking system.

Markets around the world surged on the announcement, with some European indexes rising as much as 4%. In the United States, the Dow Jones Industrial Average shot up 200 points at the open. The Standard & Poor's 500 Index was up about 25 points, or just under 2%.

Don't get used to it, Rogers said.

To continue reading, please click here...

How to Avoid the Approaching Bond Market Debacle

If you're an income investor, you probably feel like you're in one of those nightmares where you're trying to run like hell - but aren't getting anywhere.

Martin Hutchinson and I were talking about this predicament last week.

As editor of the Permanent Wealth Investor, Martin is our income guru here at Money Map Press. His advice on how to thrive in this lousy-income environment was so good that I had to pass it along to you - along with one of his favorite income plays.

Traditionally, bonds - especially U.S. Treasury bonds - are the favored holding of income-seekers. But bonds face two big challenges right now - and we have the U.S. Federal Reserve to thank for both of them.

First, thanks to the ultra-low-interest-rate policies of the nation's central bank, Treasury bonds are yielding next to nothing. When I looked Friday afternoon, the 10-year was yielding 1.94% and the 30-year 3.12%.

Now, according to the latest federal figures, the U.S. consumer price index (CPI) fell to 2.7% in March from 2.9% in February. The CPI is the "official" gauge of U.S. inflation. But as we explained back on March 2, this is a bogus number.

The American Institute for Economic Research (AIER) says everyday prices - the ones that matter most to working Americans - are up a good 8% over the past year.

So income investors who stick to traditional tactics are actually losing ground to inflation. And you absolutely don't want to outlive your money.

If that were the only problem, it would be pretty bad. But there's a second challenge - and it's a doozy.

You see, the central bank's Federal Funds rate - the benchmark that helps determine most borrowing rates that American consumers and businesses pay - remains down near zero. And while no one can predict with certainty when rates will change, there is one thing you can bank on: When rates do change, they can only go up.

And since bond prices move opposite interest rates (bond prices fall when rates rise, and vice versa), those fixed-income securities will take a beating when rates increase.

And so will the investors who hold them.

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Four Ways to Play the Bond Market Bubble

To hear the "bond bubbleistas" tell it, the bond market is poised to collapse the second interest rates start to rise.

But if you're thinking about dumping all of your bonds, you should think again.

Yes, rates will rise - but not as fast as many analysts are forecasting. What's more, even if rates do increase, the price risk is not as bad as you might think.

That's why the more appropriate strategy is to simply reorient your bond portfolio, rather than pull out all together.

Don't get me wrong. I'm not trying to make light of the global financial crisis or our current situation, but people have been calling for an "end" to bond markets, in one form or another, for quite a long time.

Failed Forecasts

PIMCO cofounder and fund manager Bill Gross has actually done so twice, most recently dumping all government bonds in early 2011. He's since admitted he was wrong and piled back in. Granted, his business is bonds so he had to, but the point is moot.

PIMCO investors paid through the nose in lost performance, though. The PIMCO Total Return Fund was up just 3.2% as of August, trailing more than 70% of its peers and lagging the 5.6% return of its benchmark index, according to Bloomberg.

Meredith Whitney famously called for the $3 trillion muni-market Armageddon in November 2010. Her clock is about up and she's mentioning nothing about her prediction in recent appearances despite turning the bond markets upside down for months.

Even economist Nouriel Roubini has eaten crow when it comes to bonds. He called for the complete meltdown of everything we knew to be true in 2004, 2005, 2006, and 2007. And while he's since become a media darling, his predictive record is less than stunning. Journalist Charles Gasparino, who investigated Roubini's track record, noted that he couldn't find a "single investor who regularly uses his research."

My point is not that any of these incredibly smart people were wrong - everybody is wrong from time to time - just that investors risk a lot by not "risking" anything.

Let me explain.

No Substitute for Stability

Fueled by banking blunders and the European banking crisis, U.S. Treasuries have not only risen this year, they've rocketed so high that in August the benchmark 10-year yield dropped below 2% for the first time since 1950 and traded at around 1.96% yesterday (Thursday).

That means investors who hung in there despite the risks and the hype have enjoyed a nice return from bond appreciation even as they continued to reap the benefits of the yield those bonds kicked off. Those who bailed out did so prematurely and got left behind.

To continue reading, please click here...

Money Morning's Fitz-Gerald On PIMCO Bond Sell-Off and Stock Market Drop

Bill Gross, manager of the world's largest bond fund at Pacific Investment Management Company (PIMCO), rattled bond investors when he announced yesterday (Wednesday) the fund has eliminated its holdings in U.S. government debt. PIMCO's $237 billion Total Return Fund said it is increasing its holdings in debt of corporations and of emerging markets like Brazil […]

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Bond Market Outlook: Four Ways to Hedge the Looming Fixed-Income Fiasco

Many investors are afraid of inflation because they understand the run-up in prices will take a big bite out of their wallets - and their buying power.

While that's a valid concern, I'm much more worried about one of the other possible fallout effects of the expected inflationary surge - the potential for the worst global bond rout in nearly 20 years.

But here's the thing: Even if that happens, it doesn't have to hurt. In fact, you can turn it into such a big profit that even the inflationary pressures will seem like a minor nuisance.

Let me explain...

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