My name is Greg Canavan.

My findings are alarming.
I've created this time-sensitive and report to warn readers of The Daily Reckoning and Money Morning that:

I have identified four urgent SELLS on the Australian stock market

All investing is risky.

But right now there is even more risk in many Aussie shares than late 2008... Just before global stocks took a massive dive.

Not all of the market is exposed.

Just four sectors.

I have done detailed analysis on these four sectors and found each could fall fast and hard in the next three to six months.

If you manage your family money and you're invested in these areas, your money could be in danger.

In this letter, I'll explain why...

You should sell these positions NOW

Maybe you think the mass-selling of stocks is over for 2011.

You might even believe Australian shares are looking good value right now.

Maybe your financial advisor is telling you "you won't see more favourable prices than right now. It's time to buy."

Please – don't.

Not until you've read this report.

Four different sectors of the ASX are at risk of double digit falls in the next six months.

These risks aren't reflected in current stock prices.

But when they are priced in, these four sectors will have fallen like sacks of wet cement.

I'm going to reveal exactly what they are in this letter.

You'll soon see why I believe another huge market crash could happen within six months.

A four-step plan for sound investing in an unsound market

Post-bubble recoveries are different from standard recoveries.

There is more pain coming.

First, get out of the four 'danger assets' I will name shortly.

• Second, invest in cash, gold and silver. (If you think precious metal prices have reached a top, you're wrong. We're going to see more record highs for the rest of the year and in 2012.)
• Third, build a portfolio of quality precious metal mining stocks.
• Go for companies trading BELOW their intrinsic value. Right now there are a few.
• Finally, own a few small but sound crisis investments that do well in times of upheaval...

If you do all four of these things you should be covered, no matter what happens.

But if you remain exposed to these 'danger assets' I'll tell you about in a moment you're going to feel some pain in the coming months.

I'll back this claim up in a few moments.

Please read on.

Because I'm going to present you with the kind of analysis I usually reserve for readers of my newsletter Sound Money. Sound Investments.

I'm going to show you EXACTLY what I see coming.

If I'm right it's 2008 all over again...

Danger Asset #1: These so-called 'defensive
Shares' are actually UNSAFE and OVERVALUED.
SELL NOW even if your broker begs you not to...

What if your 'safe stocks' aren't safe at all?

My data analysis indicates four of Australia's supposedly safest stocks are about to fall sharply.

I'm not going to hold back the names of these stocks.

These are four stocks I'd wager you already own... or may be thinking of buying soon for their alleged 'defensive' qualities.

Don't.

A few minutes reading what I have to say could save you from serious losses and feeling very foolish in a year's time.

I'll explain...

You probably know the term 'defensive stock'.

These are stocks where investors are supposed to find safety in an economic downturn.

Classic defensive sectors include consumer staples, banks, utilities, health care, alcohol and gambling.

Companies in these sectors tend to see less of a drop-off in demand – or even increased demand – in hard times.

Probably good stocks to own now, right?

No. They are bad stocks to own.

If you do you should think long and hard about whether it's worth holding them in 2012.

Here's why...

I predicted the last fall in defensive stocks correctly. This one could be more brutal...

Greg predicting an exodus from defensive stocks in January 2009

On 12th January 2009 I went on CNBC to talk about whether investors should stay in defensive stocks.

Remember, this was just after the GFC kicked off.

The ASX had rebounded 14% above its low in November 2008. But it was still down 45% since its 2007 high.

The interviewer asked me if defensives were a good buy.

I said:

"There is a risk the defensives have had a great run and – relative to some of the other stocks on the market – and they are now expensive."

In just the following six months take a look at how these 'rock-solid' stocks fared:

• Healthcare product maker and defensive staple Ansell Limited shares tanked -31%.
• Two classic gambling defensives – Tabcorp and Tatts Group – fell -3% and -9% respectively.
• Worldwide beverage producer Coca-Cola Amatil plummeted 9.5%

How did I generate my call to ditch defensive stocks like these?

More importantly:

'Forensic' scan shows defensives are DEADLY

I use a 'forensic value detection' system to pick good and bad investments.

I started mentally developing it when I was at university.

I was doing basic accounting and financial mathematics as a post-graduate. So I had no fear of numbers, which scares most people away from looking for a company's intrinsic value.

What's intrinsic value?

It's the ACTUAL value of a business, rather than the value the market puts on its stock.

Most people don't know this, but they are two very different things.

Identifying – and profiting from – the difference between a stock's

INTRINSIC value and its MARKET value is the core of my investment philosophy.

It's a very good philosophy to adopt right now.

Because there is a lot of irrationality and fear in the market.

And that is causing a larger than normal gap between the true value and the market value of many stocks.

I first put this method to test in the market while working for a small division of a big bank that did equities research.

Later – in my mid-twenties – I used this same method to personally invest, starting with $100,000 capital.

I soon discovered a flaw in the thinking of most value investors

Many of them advocated 'bottom-up' research – that is, ignore the macro climate and just focus on a company's 'fundamentals'.

But 'Austrian' economics – a little known school of economics based on common sense and human behaviour – has taught me that central bank and government policy has a major impact on the 'fundamentals'.

You can't remove a company from its position in the world and analyse it separately.

So I started to approach value investing in a very unorthodox way.

To start by looking at the macro outlook.

Value traditionalists scoff at that. For them news-flow, central bank intervention and geopolitics is meaningless noise.

But I'm convinced you invest more soundly if you can link the two:

Get a macro perspective and THEN – with that pointing you in the right direction – undertake a 'forensic' analysis to find good stocks.

Once you have a shortlist of stocks based on your big picture analysis, you put everything under the microscope – no matter how obscure. If value is there, you'll squeeze it out of a company's balance sheet and income statements soon enough.

Comparing profitability ratios... making sure you adjust past figures to currency fluctuations... finding hidden value in dividend franking... determining if there is enough cash flow to pay dividends AND fund the investing a company says it's going to do...

I'll admit it's not sexy.

But my experience tells me the only way you make consistent money over time from shares is if you look for value.

In other words:

Buying shares for less than they're worth

My 'forensic value detector' reveals INTRINSIC VALUE locked into a stock that's invisible to most other investors.

By detecting 'intrinsic value' you find more winners over time.

And avoid more losers.

But you DO need to know two things:

1. My 'forensic value detector' works. This year I used this method to detect value in gold, silver and mining stocks.
2. The 'Extreme Overvalue' alarm has just sounded for Australian defensive shares. As a sector I have determined that defensives are now very poor investments from a risk-reward perspective.

Specifically,

I have identified four of the most overvalued defensive stocks on the ASX right now

They are Crown Casino (CWN.AX), Asciano (AIO.AX), AGL Energy (AGK.AX) and Santos (STO.AX).

This, of course, is my opinion.

You won't find many mainstream sell calls on these stocks.

I've said for three years that gold... then cash... THEN shares are the order in which you'd be prudently invested.

Just look at these assets' price history. I was right.

I realise saying 'get out of defensives' in such a dicey market might seem crazy.

But I stand by this call.
Just before defensives dived in 2009 I warned CNBC viewers:

That's exactly what happened.

I think it's going to happen again now.

Only I think it's going to be MORE brutal for investors who hold onto defensive pockets of the market too long.

You're better off being OUT of the perceived safety of these defensives and looking to deploy your capital WHERE THE VALUE IS.

Where is the value?

My first 'danger asset': defensive stocks.

Where else is your capital in imminent danger?

'Danger Asset' #2: Australian manufacturing has the "Dutch Disease"

"Dutch Disease" was a phrase first coined by The Economist in 1977.

It referred to the negative impact Holland's North Sea oil discoveries had on other sectors. Mainly manufacturing.

Only when the oil started to dry up did the Dutch realise the dire affect the boom had on other sectors.

In February 2011 I uncovered evidence this was happening in Australia...

...and that a huge part of Australia's economy was in QUIET REVERSE.

Until now this manufacturing reversal was masked by our strong resources sector.

Not anymore.

Since my warning last February:

• Manufacturing companies are vanishing.
• And Credit rating agency Dun & Bradstreet has sounded the warning bell for further deterioration. It released data showing business failures in the sector have risen by more than 60% since 2008.
• BlueScope Steel has become the canary in the coal mine. You probably know Australia's largest steelmaker is on the ropes. It recently announced it was cutting more than 1,400 jobs and would "cease exporting steel because of the strong Australian dollar".

Most shockingly...

No wonder the Prime Minister just ruled out a fresh review of the sector.

The findings – if made public – would cause a national panic!

Now, without wishing to sound conceited...

I predicted ALL OF THIS

If you owned BlueScope Steel shares and took my advice to sell you could have done so at $2.15 per share.

BlueScope shares now trade at around 70 cents.

If you'd ignored my advice and held on to BlueScope shares they would have fallen over -65%.

In just seven months.

How did I see this coming when so many didn't?

By using what I referred to earlier: a 'forensic value detection' system that finds sound and unsound investments.

This 'detector' can be applied to both individual stocks AND whole sectors of the market. At the start of the year I told readers that Aussie manufacturing was an unsound sector. Then I zoomed in and did 'forensic analysis' on the industry's key players...

By 'forensic' I mean much more detailed than normal value investing, where you look for a company with a low P/E ratio and high dividend yield.

What I do is a five-year history that yields 'forensic' clues to the TRUE state of a company. Dividend and franking info, retained profits, changes in reserves, and cash flow from investing activities... these are all clues as to whether a company is much healthier or unhealthier than the market realises.

It can be daunting for the newcomer. And it's not required knowledge for anyone but the most die-hard of value enthusiasts.

But don't be tricked by pundits saying manufacturing stocks are looking like bargains in the months to come.

There is no value there

There won't be for a long time.

Unlike 99% of the pundits you see on TV or in the press... I'm not affiliated to an investment bank, brokerage or fund manager.

And my core belief differs wildly from the one-dimensional view offered by financial service providers.

That belief is:

The international monetary system continues to operate on unsound foundations. And it will do so for some time yet.

That's not a line you hear from those in the pay of our bloated investment industry.

And they're nearly always the 'experts' you see telling you everything's going to be OK.

I can tell the truth.

And it's this:

The global financial system is as broken as it was in October 2008

If you're going to invest in a climate like this, you need to make decisions that might not be popular or fashionable.

Let me show you what I mean...

• At the start of 2010 mainstream media and finance started claiming the decade-long gold bull was over. Millionaire investor George Soros called it "the ultimate asset bubble."
  
  I told my readers the opposite: "While major nations around the world are busily trying to inflate their way back to prosperity gold's role as a guardian of wealth will come to the fore... It's almost guaranteed that gold price strength will endure for years to come."
  
  When I wrote that, gold was trading at US$1,078 an ounce.
  
  Gold recently topped US$1,900.
  
  If you'd taken my advice and not George Soros' your gold would have been worth 70% more than it was just 19 months ago.
• By February 2010 stocks had been rallying hard for a year. I told my readers that for anyone who was still bullish on stocks, "wealth destruction awaits." With one exception. Gold again. This time gold equities. I wrote: "We are in the midst of an epic gold bull market and it therefore makes sense to allocate some of your capital to the sector."
  
  I then turned my 'forensic value detector' onto mid-tier gold miners.
  
  But cheap isn't necessarily a sound investment...
  
  Look – it's very hard to correctly value a gold miner.
  
  These businesses are largely based on speculation. Estimating value when future revenue, costs and mining conditions are uncertain is difficult.
  
  But not impossible.
  
  Not if you treat a company's financial statements like a crime scene and forensically dissect cash flows, exploration expenditure and net debt.
  
  And not if you do all this with a backdrop of a steadily rising gold price.
  
  That's what I mean about introducing a 'macro' perspective into value investing. If you don't you're wilfully ignoring all the information you needed to make a sound investment.
  
  Financial advisors don't recommend their customers keep a large portion of their capital in cash. The industry has conditioned investors to think cash is useless. Apparently your wealth is not 'working for you' if it's in cash.
  
  That's a dangerous lie. In a market like this cash is king. I told my readers that "cash is valuable not for what it will earn you now, but for what it enable you to buy later."
  
  For the last two years I have recommended a cash holding of at least 50% of your entire portfolio. This WOULD have 'worked for you'.
  
  Over that time the Australian dollar has gone from 80 cents US to $1.10 and back to 98 cents.
• On June 30 2010 I told readers that silver were about to be 'remonetised' alongside gold, writing: "If silver can sustain a break through the US$19 area, we reckon it will go on and record new highs in a matter of months."
  
  My advice was to immediately start buying physical silver.
  
  Silver now trades around US$41 an ounce.
  
  Your silver investment would now be up 111% in a mere 15 months.

That is the kind of rise you expect from a microcap.

Not a piece of metal.

The above decisions seem sensible and sound in retrospect, sure.

At the time, remember, things were not as clear.

Here's another that I think I'll be proved right about:

There are four stocks you SHOULD buy now

Since early 2010 when I began publishing Sound Money. Sound Investments I've continually told my readers to be cautious.

It's an approach that paid off.

Just before the market sell-off began in April this year, the SMSI portfolio had a 70% cash weighting and over 20% weighting to gold and gold stocks.

Since then the market has sunk like the Titanic and gold has soared.

Many investors have already seen their hard-won gains from 2009/10 evaporate. And they've thrown in the towel and exited the market wholesale.

But have good stocks been sold as well as bad ones in recent months?

Yes, according to my analysis.

History has shown the best time to buy is when everyone else thinks you're an idiot for doing so.

And there are four specific stocks that are now looking excellent value.

Obviously they're not operating anywhere near the four danger sectors I've been investigating.

But I believe these stocks are now trading at prices SO attractive you should add them to your portfolio now.

But only if you have cash you're willing to shift back into equities.

And not until you've made sure you're clear of the four 'danger assets' in this presentation.

First I need to warn you of two more very dangerous sectors to be in over the next two years...

Danger Asset #3: First America, then Europe... and now the 'Debt Bomb' is about to hit Australian banks

I first sounded the warning on Aussie banks in February 2010.

This is sacrilege if you're a fund manager.

But I am not a fund manager.

I'm not required by my employers to diligently maintain index weightings towards the Big Four.

If the banks are unsound, I can warn my readers.

I did 19 months ago.

And I explained why the Big Four banks would remain 'unsound investments' for several years to come.

Using my 'forensic value detector' I singled out Commonwealth Bank as the member of the Big Four trading at the most unattractive price.

I advised my readers to AVOID.

And those who already owned CBA shares to "REDUCE exposure now and on any subsequent price strength."

Since then Commonwealth shares have fallen back -14%.

So it was sound advice.

But for Commonwealth and the other three majors, the real pain is only just beginning...

The GFC is a result of what I call 'unproductive debt'.

This debt has come from unsound monetary and fiscal policy.

It's bad debt.

Debt that's on the banks' books. But that's unlikely to ever be repaid.

It's already gutted Europe and the US.

Now it's OUR TURN.

That's why the Big Four banks will be 'danger assets' next year.

A lot of pro and novice investors reckon banks are good investments right now.

Because of strong dividend yields and SEEMINGLY good value.

It's a tragedy in the making. Because I think you're going to see some strong buying of bank stocks followed by

A DRAMATIC, SECTOR-WIDE PLUNGE

You shouldn't own bank stocks when this happens.

My forensic analysis shows where most of Australia's unproductive debt resides: on the banks' balance sheets.

Believing the banks represent good value means you believe their balance sheets – meaning their assets – are strong.

They're not.

I've labelled banks extremely unsound since I started my newsletter in February 2010.

But as I recently wrote to readers:

Without going into too much forensic detail, I'll explain it very simply for you. It's:

Time for Australia's own sub-prime disaster

A big GFC driver was the US subprime housing crisis.

Now we're about to experience our own version.

And it won't be 'subprime-lite' as I've seen some pundits call it.

It'll be HEAVY.

And it'll devastate Australian bank balance sheets.

To understand what this means for investors like you who may hold bank shares, you need to know this:

What's bringing this all to a head is a weakening property market.

You know the story.

Prolonged low interest rates in Australia in the early 2000s caused a house price boom.

This boom has defied critics.

It has refused to start 'reverting to the mean'.

Until now.

The effects of government stimulus are wearing off. The housing market is showing signs of stress.

Now borrowers who took out crazy mortgages are facing reality: property prices don't always rise.

Both borrower and lender thought property would only rise in price.

These 'investors' are now finding themselves geared to a dangerously high level.

The promise of permanent capital appreciation is no longer guaranteed.

It just took a few years longer than it did in America for the mountain of unproductive debt to become too huge to ignore.

But it's happening now.

According to data compiled by the Reserve Bank, housing credit growth in the year to July was just 6%.

That's the weakest reading since the RBA started collecting data in the mid-1970s!

Mark my words:

In 2012 you'll see the first headlines about Aussie mum and dad investors being forced into 'negative equity' – owing money to the banks after the sale of their property.

More and more loans will turn 'bad'.

Really simply:

This bad debt is going to fester on Big Four balance sheets

Look, balance sheets may not be interesting or even useful to you.

But for my method of investing, they are to be forensically investigated like a crime scene.

It's meticulous work.

It relies on pinpoint analysis of a company's capital structure, cash-flow, income... AND IT’S DEBT.

And this cold, emotionless bookwork has revealed the following:

That's why banks are 'danger assets'.

And that's why YOU should avoid them.

If you own them now, dramatically scale back your position when those shares show short-term strength.

You will soon see the value of making sound investing decisions in unsound times

What do I mean by 'unsound times'?

Well, while central banks like the US Federal Reserve keep printing money to spur a recovery... the global monetary system will remain unsound.

Investors are starting to understand that the financial system is based on debt... debt that can never possibly be repaid.

Defaulted on? Maybe.

Refinanced? Difficult.

Inflated away? Definitely.

That's what the Fed is all about.

But confidence in the Fed is slowly eroding. Longer term, that's a good thing. But in the short term markets will get even more dangerous.


In fact I'll say this now:

Soon it will be time to start deploying your cash into 'deep-value' stocks

It's a very good time to take a look at my newsletter, Sound Money. Sound Investments., right now.

As you can probably tell, I have been bearish for some time.

For large sections of the market and economy – including the four 'danger assets' we've been talking about – I still am.

But prices are much lower now than six months ago.

I think valuations are now beginning to look very reasonable.

This is DESPITE the four sectors where I'm seeing severe weakness.

Don't get me wrong:

I expect more falls in the weeks ahead

And if, like my subscribers, you're lucky enough to have stayed mostly in cash while the market crashed...

...IT WILL SOON BE TIME TO PUT THAT CASH TO USE.

I have found what I believe are the four best 'deep value' opportunities on the ASX right now.

I've just finished a report on them called Four Deep-Value Stocks to Buy on Market Dips


The four companies I've been researching cover the spectrum of conservative to speculative. But all have two things in common: they are potentially highly profitable and currently trading well-below their intrinsic value.


But I have one last urgent warning I want to share with you.

And, for uninformed investors, it could be the most heartbreaking of all...

Danger Asset #4: Why 'Mining Middlemen' will suffer next year like factory workers are suffering now

I've done the numbers and ...

This sector is mining contractors and service companies.

Here's why...

You know Australia's resources industry is incredibly dependent on China's growth.

But China's growth is about to start pulling back.

This is going to dampen demand from the Chinese steel mills. In fact it will start to depress commodity prices across the board.

This is going start happening soon.

And it's not just me predicting that.

JPMorgan's head of global markets China, Jing Ulrich, predicts growth will slow to about 7% in China, putting downward pressure on steel prices.

She says: "Commodity prices are hovering at record highs so if China's growth decelerates you will see a correction in commodity prices..."

What most local commentators can't see or won't admit is this:

The 'fix-it' guys will be first against the wall

The contractors and the mining service providers are first people you call when you want to bring a new mining project online.

And the first contract you cut up when you want to scale back operations.

The big miners currently have tens of billions of new investment planned.

When China suffers the inevitable consequences of its credit boom – just like America and Europe before it – these projects will be withdrawn or delayed.

And the mining services industry will get sledge hammered.

I got it right this year on manufacturing.

If you own any of these 'danger assets' and hold onto then, you better wish I'm not right about the most toxic sector in 2012.

It now looks increasingly likely the American Fed will red-stamp YET ANOTHER bout of 'Quantitative Easing'. That means we're going to remain in the strange world where one man in the form of Ben Bernanke can artificially make stocks go up at the sign of a pen.

That's an unsound world to invest in.