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0vei the last Su yeais, the 0S has built up iecoiu
uebts on a peisonal, state, anu national level.

Consumeis thought they weie financially stable
so long as they coulu covei the inteiest payments
on theii cieuit caius, states cieateu piogiam
aftei piogiam few if any of which they coulu
affoiu, anu the Feueial uoveinment issueu $Su-
Su tiillion in uebt anu liabilities (counting Social
Secuiity anu Neuicaie).

This all came to a scieeching halt when the
housing bubble (aiguably the biggest uebt
bubble in histoiy) imploueu in 2uu7.

Since that time, stocks have stageu one of theii
woist yeais on iecoiu (2uu8), one in five us
moitgages has fallen unueiwatei (meaning the
moitgage loan is woith moie than the home
itself), anu some tiillions in 0S householu wealth
has evapoiateu.

These issues seem to be uistinct, but in ieality
they all stem fiom a uebt pioblem. Anu as you
know, theie is only one legitimate way to ueal
with a uebt pioblem:

Pay it off.

Bowevei, insteau of uoing this, the Feus (the
Feueial Reseive, Tieasuiy Bept, etc.) have been
piouucing EvEN N0RE BEBT. Beie's a biief
iecap of theii moves thus fai:



!"#$#%"$& ()"*"* +,-.#/ 01-+
2.)3"3$& 4."/5

In This Report

The Feu's "kitchen sink" faileu
to make the big banks solvent.

A case stuuy of how the next
Ciises will unfolu anu what
the waining signs will be.

The stocks to buy if you N0ST
own stocks to the long-siue.

Bow to take out "catastiophe
insuiance" on youi poitfolio.

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The Feueial Reseive cuts inteiest iates fiom S.2S-u.2S% (Sept 'u7-touay)
The Beai Steains ueal Feu buys $Su billion in junk moitgages (Naich 'u8)
The Feu opens vaiious lenuing winuows to investment banks (Naich 'u8)
The SEC pioposes banning shoit-selling on financial stocks (}uly 'u8)
The Tieasuiy buys FannieFieuuie foi $4uu billion (Sept 'u8)
The Feu takes ovei AIu foi $8S billion (Sept 'u8)
The Feu uoles out $2S billion foi the auto makeis (Sept 'u8)
The Feus' $7uu billion Tioubleu Assets Relief Piogiam (TARP) (0ct 'u8)
The Feu buys commeicial papei (non-bank uebt) fiom non-financials (0ct 'u8)
The Feu offeis $S4u billion to backstop money maiket funus (0ct 'u8)
The Feus backstops up to $28u billion of Citigioup's liabilities (0ct 'u8).
Anothei $4u billion to AIu (Nov 'u8)
The Feu backstops up $14u billion of Bank of Ameiica's liabilities (}an 'u9)
0bama's $787 Billion Stimulus (}an 'u9)
The Feu's $Suu billion Quantitative Easing Piogiam (Nai 'u9)
The Feu buying $1.2S tiillion in agency moitgage backeu secuiities (Nai 'u9-'1u)
The Feu buying $2uu billion in agency uebt (Nai 'u9-'1u)
QE lite buys $2uu-Suu billion of Tieasuiies anu moitgage uebt (Aug '1u)
QE 2 buys $6uu billion in Tieasuiies (Nov '1u)
0peiation Twist ieshuffles $4uu billion of the Feu's poitfolio (0ct '11)
QE S buys $4u billion of Noitgage Backeu Secuiities monthly (Sept '12)
QE 4 buys $4S billion woith of Tieasuiies monthly (Bec '12).

Anu that's a BRIEF iecap (I'm suie I left something out).

In a nutshell, The Feus have tiieu to combat a uebt pioblem by ISS0INu N0RE BEBT. They'ie
pumping tiillions of uollais into the financial system, tiying to piop Wall Stieet anu the stock
maiket. They've manageu to kick off a ially in stocks.
But they BAvE N0T ABBRESSEB TBE F0NBANENTAL ISS0ES PLAu0INu TBE FINANCIAL
NARKET.

Stocks aie heaueu foi anothei Ciash, possibly as bau as the one we saw in 0ctobei-Novembei
2uu8. As you know, that Ciash wipeu out $11 tiillion in householu wealth in a mattei of weeks.
Theie's no telling the uamage this Seconu Rounu will cause.

The Feus have thiown eveiything they've got (incluuing the kitchen sink) at the financial
ciisis. anu things aie funuamentally no bettei than they weie befoie: most majoi banks aie
insolvent, one in five 0S moitgages is unueiwatei, anu the stock maiket is being laigely
pioppeu up by in-house tiauing fiom a few key playeis (uoluman Sachs, 0BS, etc).
Regaiuing stock investing, it's impoitant to take a big pictuie of stocks as an asset class. The

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common consensus is that stocks ietuin an aveiage of 6% a yeai (at least going back to 19uu).

Bowevei, a stuuy by the Lonuon Business School iecently )535$&5/ 67$6 175# 8-. )59-35
/"3"/5#/*: *6-%;*< =$"#* /)-> 6- $ 95)5 ?@AB $ 85$) C535# &-15) 67$# 675 )56.)# D)-9
&-#=E65)9 0)5$*.)8 F-#/* -35) 675 *$95 >5)"-/G@

Put anothei way, uiviuenus account foi 7u% of the aveiage 0S stock ietuins since 19uu. When
you iemove uiviuenus, stocks actually offei LESS iewaiu anu N0RE iisk than bonus. If you'u
investeu $1 in stocks in 19uu, you'u have maue $S82 with ieinvesteu uiviuenus aujusteu foi
inflation vs. a meie $6 fiom piice appieciation.

So as much as the CNBC ciowu woulu like to believe that the way to make money in stocks is
buying low anu selling high, the ieality is that the vast majoiity of gains fiom stocks stem fiom
uiviuenus.

Which biings us to touay. By most histoiic metiics, the maiket is showing signs of a significant
top. Beie aie just a few key metiics:

1. Corporate debt is back to 2007 PEAK levels.
2. Stock buybacks are back to 2007 PEAK levels.
3. Investor bullishness is back to 2007 PEAK levels.
4. Margin debt (money borrowed to buy stocks) is at 2007 PEAK levels.
5. The leveraged loan market is flashing major warnings.
6. Corporate insiders are dumping shares at a pace not seen since the TECH BUBBLE TOP
7. Numerous investment legends have warned of a coming crash.
8. Investor complacency is at a record LOW.
9. The Fed has confirmed QE is ending this month, so the juice is cut off for now.

In plain teims, the ouus aie high that a Top is foiming in stocks. With that in minu,
if youi poitfolio is heavily investeu in stocks, now is a time to be taking some piofits. If you can,
consiuei moving a sizable chunk into cash.

The maiket is extiemely tiieu anu the systemic iisks unueilying the Financial Ciisis aie in no
way iesolveu. With investoi complacency (as measuieu by the vIX) at iecoiu lows, the Feu
withuiawing seveial of its moie significant maiket piops, anu low paiticipation coming fiom
the laigei institutions, this maiket is iipe foi a seiious coiiection.

The maiket is extiemely tiieu anu the systemic iisks unueilying the Financial Ciisis aie in no
way iesolveu. With investoi complacency (as measuieu by the vIX) back to pie-Ciash levels,
the Feu withuiawing seveial of its moie significant maiket piops, anu low paiticipation coming
fiom the laigei institutions, this maiket is iipe foi a seiious coiiection.

6
4

I'm not saying this will immeuiately happen. But at some point theie will be a new iounu to the
Financial Ciisis. When that happens, we WILL have anothei Ciash. Inueeu, it is quite possible
that stocks aie making a vERY significant top, so being heavily investeu in stocks going foiwaiu
uoesn't make much sense. Take some money off the table. If you neeu a place to put it, I suggest
physical cash oi uolu Silvei bullion.


HD I-. JK20 26$8 L-#=: 27"D6 6- M.$&"68

If you B0 have to stay investeu in stocks, now is the time to be shifting out of junk into quality.
The maiket ially fiom Naich 2uu9 has laigely been leau by junk companies (financials,
ietaileis, etc). Neanwhile, quality has laggeu uiamatically.

As an example, let's compaie the peifoimance of Coke (K0) to Bank of Ameiica (BAC).

K0 is one of the best, most piofitable bianus in the woilu. The competitive moat aiounu this
business is extiaoiuinaiy anu it iemains one of the most easily iecognizeu fianchises on the
planet. You can uiink six glasses of Coke a uay anu still enjoy it the next uay. That quality is
almost nowheie to be founu in any othei foou beveiage on the planet: even chocolate woulu
get olu aftei six bais a uay.

BAC on the othei hanu has swalloweu Countiywiue Financial ANB Neiiill Lynch's gaibage
assets. It is effectively insolvent baseu on its ueiivative exposuie alone (the company has
ueiivatives equal to S,uuu% of assets). BAC's balance sheet is like an open sewei anu without
seiious goveinment inteivention the company woulu not even exist iight now.

Anu yet, BAC's stock has uiamatically outpeifoimeu Coke since the maiket bottomeu in 2uu9.



7
5


This ielationship woiks to the uownsiue as well. What I mean is that when stocks come
unhingeu, Quality (Coke) then outpeifoims uaibage (Bank of Ameiica) hanus uown.



8
6

So, if you BAvE to iemain investeu in stocks to the long siue foi whatevei ieason, now is the
time to be moving into high quality companies. This means finuing companies with low uebt,
lots of cash, stiong iesults (K0 actually uREW ievenues in 2uu8), anu significant competitive
auvantages.

Also, anu this is ciitical, look foi companies with stiong balance sheets: companies that will still
EXIST if theie's anothei Ciisis. Bepiession oi no, people will still uiink soua, alcohol, smoke
cigaiettes, anu neeu meuicine. I've compileu a list of companies you shoulu consiuei if you neeu
to iemain involveu in stocks going foiwaiu:

(-9>$#8 289F-& 25%6-)
Coke K0 Soft Biinks
Buuweisei B0B Alcohol
}&} }N} Neuicine anu Big Phaima
Wal-Nait WNT ueneial Retail
Exxon Nobil X0N 0il
Pioctoi & uamble Pu Consumei goous
Pfizei PFE Big Phaima

You'll note that most of these companies pay uecent uiviuenus. This is ciitical going foiwaiu.
With stocks oveivalueu, you want to make suie you'ie at least getting paiu foi iemaining
involveu in the maiket.

Bowevei, theie is an auueu bonus to owning Quality stocks iight now. Because this maiket
ially has laigely been uominateu by uaibage stocks, Quality companies like Coke have not yet
iisen to extieme valuations. Thus, you can still buy them at ielatively cheap levels (less than 1S
times cash flow). So, in a sense, they aie a goou investment baseu on piicing as well.

I want to stiess that these investments aie only if you BAvE to stay in stocks foi some ieason. If
theie is anothei collapse these companies will fall like eveiything else. Bowevei, they will likely
fall less than the iest of the maiket

So while I uo not expect these positions to make a lot of money now (these aie not shoit-teim
tiaues), they shoulu sheltei you fiom losing too much money shoulu anothei Ciash hit. Inueeu,
if the maiket B0ES collapse anu these companies fall 1u-1S% acioss the boaiu (while the
maiket falls Su%+) I woulu consiuei these investments even N0RE attiactive than they aie
touay.

Let me explain.


9
7
volatility can eithei huit you oi be youi fiienu. Nost people woulu sell a position if it fell 2u-
Su%. This is wise if you'ie investing baseu on momentum. Bowevei, if you'ie investing baseu
on value, then uoing this is completely antithetical to attaining high ietuins.

Consiuei Coke. Let's say tomoiiow Coke collapseu fiom $SS to $2S pei shaie. Nost investois
woulu panic anu sell. I, on the othei hanu, woulu be buying gieeuily. Why. Because Coke's
business has a funuamental value. Even uuiing a Financial Ciisis anu Bepiession, people will
continue to uiink soua.

So the oppoitunity to buy Coke at $2S a shaie (which woulu be 7-8 times cash flow) woulu be
tiuly an extiaoiuinaiy oppoitunity. Inueeu, fiom an income peispective alone, the oppoitunity
heie woulu be fantastic.

Consiuei that in 2uu9, Coke paiu out $1.76 in uiviuenus. With shaies at $SS, this means a
uiviuenu yielu of S.2% (ioughly thiee times what you'u get by leaving youi money in a savings
account).

N-1535): "D (-;5 *7$)5* D5&& 6- OPQ: 67$6 O?@AR *.//5#&8 F5%-95* $ AB 8"5&/ CO?@AQS
OPQ@TTG@ That's a heck of a ietuin fiom an income peispective. U35# "D =&-F$&&8 675 1-)&/
5#65)5/ $ *7$)> V5>)5**"-# $#/ (-;5<* "#%-95 D5&& F8 WTB: >.&&"#= "6* >$8-.6* /-1# 6-
O?@PW: 8-.<)5 *6"&& &--;"#= $6 $ QB 8"5&/@

Inueeu, companies like Coke offei the potential of REAL value shoulu theii shaie piices uiop.
Theii funuamentals almost ALWAYS outpeifoim investoi sentiment. What I mean by this is that
shoulu theie be anothei Collapse, Coke's shaie piice will almost ceitainly fall N0RE fiom its
cuiient levels than Coke's cash payouts oi income will fiom theiis.

Buiing 2uu8, Coke shaies fell Su% oi so. Bowevei, Coke actually INCREASEB its uiviuenu that
yeai. Anyone who bought Coke in 0ctobei 2uu8, now collects a 4% yielu on theii shaies (foui
times what he oi she woulu get fiom a bank account).

This is why companies like Coke iemain so stiong uuiing times of Ciisis. With the FBIC bioke
anu most 0S banks insolvent, investois uespeiately neeu a place to paik cash that will still
EXIST in a few yeais. Companies like Coke aie a ieasonable alteinative to a savings account in
the sense that you'ie paiu a highei yielu foi youi ueposit (now S%, but S% oi highei if Coke
shaies plunge).

XD %-.)*5: F5%$.*5 (-;5 "* $ *6-%;: 8-. %$# &-*5 ?TE?QB -) 9-)5 "D *7$)5* /)-> $#/ 8-.
*5&&@ H# $ ()"*"*: >&$"# -&/ %$*7 1"&& -.6>5)D-)9 Y.*6 $F-.6 $#867"#=@ 07"* "* 178 H<35
*.==5*65/ 9-3"#= 9-#58 6- %$*7: "D 8-. %$#@ H6<* $&*- 178 H *.==5*65/ F.8"#= (-;5 $#/
675 -675) %-9>$#"5* &"*65/ $F-35 -#&8 H! 8-. NZ[U 6- F5 "# *6-%;* )"=76 #-1@

1u
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($6$*6)->75 H#*.)$#%5\ 0)$/5* !-) ]75# 675 (-&&$>*5 N"6*

Now is also the time to be taking out some "Catastiophe Insuiance" by compiling a list of tiaues
to make once stocks begin to collapse. Let me be cleai, 675*5 $)5 #-6 6)$/5* 67$6 8-.<&& 9$;5
)"=76 #-1^ 675*5 $)5 6)$/5* 8-.<&& 9$;5 ]NU_ *6-%;* %-&&$>*5@

Peisonally, I favoi 0ltiaShoit ETFs.

If you'ie unfamiliai with 0ltiaShoit ETFs, these aie invetsments that ietuin 2X the inveise of a
paiticulai ETF. Let's take an example, the 0ltiaShoit Financials ETF (SKF).

SKF ietuins 2X the inveise of the Financials ETF (IYF). So if IYF falls S%, SKF iises 1u%. If IYF
falls 1u%, SKF iises 2u%. In this sense, SKF is a gieat "heuge" oi means of playing Financial
stocks to the uownsiue.

Bowevei, theie's an auueu bonus to 0ltiaShoit ETFs like SKF: these investments ALS0 tiaue
baseu on uemanu fiom the maiketplace. So if stocks collapse say Su%, you might actually see
gains uREATER than 6u% (2X the inveise) uue to investois piling in as they seek to piofit fiom
the collapse.

Consiuei SKF's peifoimance in 2uu8, foi example. In 2uu8, financial stocks (as measuieu by the
Financials ETF: IYF), fell ioughly Su%.



11
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Bowevei, if you'u bought SKF once the Ciisis ieally took holu (late Septembei), you coulu have
maue N0RE than 1uu% in two month's time:



This is what makes the 0ltiaShoit ETFs so hanuy when a Ciisis hits: because they tiuly
skyiocket as investois stampeue like elephants into safety.

N-1535): H JK20 20,U22 67$6 675*5 $)5 #-6 "#35*695#6* 6- `F.8 $#/ 7-&/a@ H#*65$/: 675*5
$)5 *7-)6E65)9 6)$/5* 8-. *7-.&/ 9$;5 X_LI -#%5 *6-%;* 7$35 F5=.# 6- 6).&8 %-&&$>*5@
2"9>&8 $// 6759 6- 8-.) `-# /5%;a 6)$/5* 6- 9$;5 -#%5 675 #5b6 ()"*"* 7"6*@

You'ie piobably asking youiself, "!"# %&' ( )*+,*'-.*+! /0,#00' &' "1)*'&12 %"110%,*"' &') &
3456 71*+*+89

Let's see what histoiy shows us.

If you iecall fiom 2uu8, stocks uiun't go stiaight uown. Insteau they uioppeu, bounceu, anu
then began the seiious collapse. Looking back at that time, the Su-BNA seiveu as a useful
metiic foi gauging that a seiious uecline was about to begin:


12
10


As you can see stocks iolleu ovei anu bioke below theii Su-BNA in late 2uu7. Aftei that, the Su-
BNA acteu as stiong iesistance.

Inueeu, theie was only one bounce above this level, which lasteu ioughly a month anu a half.

The ieal tiouble began in the summei of 2uu8, anu investois weie given a uecent waining
when the S&P Suu collapseu anu then bounceu to test the Su-BNA anu faileu to bieak it.

Similai wainings appeaieu befoie the 1987 Ciash:


1S
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The Tech Bubble:




14
12
Anu the 2uu8 Ciash:



Thus, this tells us that the Su-BNA is a stiong metiic foi gauging when ieal tiouble hits stocks
again. X# 67$6 #-65: 675 6)"==5) 8-. *7-.&/ F5 &--;"#= D-) "# 65)9* -D 175# 675 #5b6 ()$*7
1"&& 7"6 1"&& F5 $ /5%"*"35 F)5$; cULX] 675 QTEVJZ D-&&-15/ F8 $ *6)-#= F-.#%5 67$6
!ZHL2 6- F)5$; $F-35 "6 $=$"#@

With that in minu, heie aie some tiaues to put "on ueck" foi when the next iounu of the Ciisis
hits.

K&6)$27-)6 U0!*\ ()"*"* 0)$/5*

Below is a list of the moie populai 0ltiaShoit ETFs:

?G 075 K&6)$27-)6 2de QTT U0! C2V2G
PG 075 K&6)$27-)6 V-1 f-#5* H#/.*6)"$& Z35)$=5 CVgVG
WG 075 K&6)$27-)6 _Z2VZM CMMMG
hG 075 K&6)$27-)6 ,.**5&& PTTT U0! C0]JG
QG 075 K&6)$27-)6 !"#$#%"$&* U0! C2i!G
RG 075 K&6)$27-)6 ,5$& U*6$65 U0! C2,2G
AG 075 K&6)$27-)6 J$65)"$&* U0! C2J_G

1S

13
jG 075 K&6)$27-)6 U95)="#= 9$);56* U0! CUU[G
kG 075 K&6)$27-)6 (7"#$ U0! C!geG
?TG 075 K&6)$27-)6 c)$l"& U0! CcmMG

In teims of poitfolio allocation, I cannot pioviue specific insights because eveiyone's iisk
appetite is uiffeient. Bowevei as a geneial iule of thumb, if you !"#$ %" iemain investeu to the
long siue of the maiket, I woulu uige you to focus on high quality companies such as the ones
listeu at the beginning of this iepoit. Bowevei, uo not simply invest baseu on this iepoit.
Always peifoim youi own uue uiligence anu consult with a financial auvisoi oi tax plannei.

In teims of investing in 0ltiaShoit ETFs, you shoulu not allocate a laige peicentage of youi
poitfolio into these investments even uuiing times of Ciisis. The ieason foi this is that these
investments can be quite volatile. Again, eveiyone's iisk appetite is uiffeient but geneially
speaking I woulu be veiy cautious about investing moie than S% of youi poitfolio into these
investments even uuiing a Ciisis.

This concluues this iepoit. Thank you foi ieauing anu be safe out theie!


Best Regards


uiaham Summeis
Chief Naiket Stiategist
Phoenix Capital Reseaich